<PAGE>
Securities and Exchange Commission
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File Number 000-17577
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CORE TECHNOLOGIES (PENNSYLVANIA), INC.
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(Exact name of Registrant as specified in its charter)
Delaware 22-2537194
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
110 Summit Drive, Exton, PA 19341
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 524-7000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report(s)) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
<PAGE>
Aggregate market value of voting stock held by non-affiliates (based on the
average of the bid and asked prices as quoted on the NASD's Electronic Bulletin
Board on March 24, 1997) was approximately $749,553. For purposes of determining
this amount only, Registrant has defined affiliates as including (a) the
executive officers named in Part III of this 10-K report, (b) all directors of
Registrant, and (c) each stockholder that has informed Registrant by March 24,
1997 that it is the beneficial owner of 10% or more of the outstanding Common
Stock of Registrant.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of March 18, 1997:
Common Stock 8,887,326 Shares
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference in this Form 10-K.
<PAGE>
PART I
Item 1(a). General Development of the Business
Prior to 1993, Core Technologies (Pennsylvania), Inc. (formerly
CenterCore, Inc., the "Company") was engaged solely in the business of
designing, manufacturing and distributing modular workstation systems and a line
of complementary office products, including air management systems for
temperature blending and breathing zone filtration. In February 1993, the
Company, through a subsidiary, acquired the assets and assumed the liabilities
of Airo Clean Engineering, Inc. ("Airo Clean"), a designer and manufacturer of
cleanroom and air filtration components and systems serving industry and the
hospital and health care markets. In September 1993, the Company, through a
subsidiary, purchased substantially all of the assets and assumed certain
liabilities of Maris Equipment Company ("Maris"), a specialty contractor
providing integration, installation and servicing of advanced electronic systems
for security access control, fire alarm, sound, communications and other
applications on a nationwide basis. These acquisitions were part of the
Company's overall strategy to improve the Company's operating performance by
penetrating new and growing markets to compensate for the government spending
decline in the market of the Company's furnishings segment.
In 1995, the Company took steps to downsize its business, concentrate
on growing marketplaces with less reliance on government spending, and pay back
its bank debt as quickly as possible. In the third quarter of 1995, the Company
sold all of the assets relating to its furnishings business to a corporation
unaffiliated with the Company and its principals. The assets sold included the
rights to the name "CenterCore"; and subsequent to the transaction, the Company
changed its corporate name to Core Technologies (Pennsylvania), Inc. In the
acquisition, the Company received $2.3 million in cash, a $2.0 million
subordinated note and installment payments payable in 1996. In 1996, the Company
received an aggregate of $1.2 million in cash consisting of installment payments
from the buyer and collections of receivables assigned back to the company from
the buyer. The principal amount of the subordinated note is being amortized on a
seven-year-level schedule with semi-annual payments and a balloon payment due
on August 25, 2000. The first semi-annual payment was made on February 25, 1997.
The subordinated note is subordinated to the buyer's senior debt.
The cash received by the Company in the sale of the furnishings
business was used to reduce the Company's outstanding bank borrowings. The
Company's financial restructuring in 1995 also included the contribution to the
capital of the Company of 2,000,000 shares of the Company's common stock by
Safeguard Scientifics (Delaware), Inc. ("Safeguard"), previously the Company's
majority shareholder. Safeguard simultaneously sold an aggregate 2,500,000
shares of the Company's common stock to officers of the Company. See Item 13. As
a result, while Safeguard remains the Company's largest shareholder, Safeguard's
beneficial ownership of the Company's common stock was reduced below 50%.
In 1995, the Company significantly downsized Maris' operations to
concentrate on the low voltage security and fire alarm business and selected
"smart highway" operations. Smart highway programs involve the integration and
installation of communications networks for automated traffic management
systems. In connection with this downsizing, Maris turned over to its surety
companies all of its bonded construction projects in progress. See Item 7.
The Company's operations are now concentrated in Maris' low voltage
electric security and life safety projects and Airo Clean's air-filtration
business. The air-filtration business grew significantly in 1996, particularly
in the commercial clean room market. In 1995, the Company's air-filtration
business acquired a new product line employing the Laminar Air Flow Patient
Isolation technology, which is a necessary component for bone marrow transplant
procedures.
<PAGE>
Item 1(b). Financial Information about Industry Segments
Financial information about the Company's industry segments is
contained in footnote 16 to the Consolidated Financial Statements contained in
Item 14 below.
Item 1(c). Narrative Description of Business
SECURITY SYSTEMS
Products and Services
The Company, through its wholly owned subsidiary, Maris Equipment
Company, Inc. ("Maris"), provides low voltage electronic security systems and
life safety systems to the commercial and institutional markets. Products
include fire alarm systems, closed circuit television surveillance systems, card
access security and alarm monitoring systems, paging and intercom systems,
hospital communications systems, parking and revenue control systems and
programmable logic controller based central alarm and control systems. The
Company no longer intends to pursue large, bonded federal correctional facility
and airport projects, and will no longer provide correctional detention
hardware, such as doors, security glazing and access operating devices, to the
correctional marketplace.
Patents and Proprietary Rights
The Company is qualified as an electrical or alarm contractor, where
required, in most of the Continental United States. Maris does not hold any
material patents or proprietary rights. In its role as an integrator, Maris
obtains proprietary products from vendors for integration and installation at
customers' facilities or on construction sites.
Marketing and Distribution; Contracting Practices
Maris has significantly reduced its marketing and sales staff in
accordance with its downsized business. The Company maintains a sales force in
its headquarters in Exton, Pennsylvania and in its regional office in Austin,
Texas. It also has satellite operations in San Antonio, Texas and New York City,
New York.
Maris focuses on bidding for smaller projects involving new or upgraded
construction to electrical contractors and on providing proposals to owners and
building managers for new or upgraded systems. These bids and proposals are
generally made at a fixed price based on the specifications provided by the
contractor, owner or manager. Accurate estimation of the Company's total cost to
complete a project is therefore crucial to profitability. Maris typically
provides the integration engineering, assembly shop drawings and system start-up
with its own staff of project managers, engineers, computer aided design (CAD)
operators and technicians.
As with any construction activities, there are risks associated with
the business. Cost overruns can occur from a variety of sources, including but
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not limited to estimating errors, owner-initiated changes to system performance
or operation, unanticipated conditions at the installation site, delays in
collection of accounts receivable because of performance issues, delays caused
by other contractors which may cause the Company to be delayed and not be
compensated for such delay, and subjective assessment of system performance
compared to specifications. Maris and its subcontractors may submit change
orders for additional work or costs incurred beyond their control or beyond the
scope of the contract, but they are subject to approval. Working capital
requires active management for several reasons. Contracts frequently provide for
a retention of five percent or more of the total contract amount until
satisfactory completion of the contract. Maris retains comparable amounts from
its subcontractors, but often the subcontractors' work is completed before
Maris' work is completed. The timing and amounts of payments due to and from
Maris are often subject to dispute for the reasons described above resulting in
delays in collection of receivables and payment of payables. Maris attempts to
match the timing of payments to its subcontractors and vendors with payments
received from the general contractors or construction managers wherever
possible.
Design and Development; Product Availability; Inventory
As an integrator, Maris purchases proprietary products for integration
and installation at customer facilities or construction sites. The Company does
not manufacture, design or develop any of its systems. The Company is a party to
a number of distribution agreements with the major manufacturers of the systems
which it provides. The Company has negotiated purchasing terms with its major
suppliers to provide products for Maris' projects. The Company will continue to
negotiate terms with a wider variety of suppliers, some of whom have had the
Company on credit arrangements which were stricter than usual terms. The
Company's relationships with several different suppliers allows the Company to
provide the latest technology to its markets without the necessity of designing
and developing new products. The Company maintains only a sufficient amount of
inventory as may be necessary to provide materials for warranty service and
repairs.
Revenue Recognition and Backlog
The Company recognizes revenues on a percentage of completion basis.
Backlog consists of the uncompleted portion of the contracts. The backlog for
the security systems segment was approximately $4.0 million at December 31, 1996
as compared with approximately $6.8 million at December 31, 1995. The Company
anticipates that approximately 80% of the backlog will be fulfilled during 1997.
The remaining backlog relates to performance under long-term service contracts.
The decrease in backlog reflects the completion of several large projects which
were secured in 1994 and completed in 1996.
Competition
The Company provides security systems to a variety of institutional
markets. In that marketplace, the Company competes with numerous local dealers
and factory direct operations. There are also numerous firms operating
nationally in the construction marketplace that provide electronic security
systems integration. Competition is based primarily on price, quality of work,
and ability to complete the work on time. The Company's past financial
difficulties and limited ability to obtain bonding are a competitive
disadvantage in the institutional markets. Many large institutional projects
require the contractor to provide a completion bond. However, in the commercial
and industrial building markets, the Company believes that its personnel and the
depth of their knowledge are important competitive factors.
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U. S. Government Sales and Dependence on Significant Customers
While prior to 1996 Maris had substantial revenues from sales to the
Federal Bureau of Prisons, Maris had no significant U.S. government sales in
1996 and does not anticipate significant U.S. government sales in 1997. No
single security systems customer accounted for more than 10% of consolidated
revenues in 1996, and the Company does not expect any single customer to account
for 10% or more of the Company's consolidated revenues in 1997.
Seasonality
The security systems business is not subject to any material seasonal
fluctuations.
AIR FILTRATION PRODUCTS
Products
The Company designs, manufactures and distributes through its wholly
owned subsidiary, Airo Clean, Inc. ("Airo-Clean"), air-filtration components and
systems which are used in a variety of industries which require particle-free,
ultra-clean working environments, as well as patient isolation devices for
hospital and health care applications.
The two room-size cleanroom systems manufactured and distributed by the
Company are the UDF Perforated Ceiling System and the UltraGuard(R) HEPA/Fan
Module Ceiling System, both of which can be delivered prepackaged using standard
components or can be custom designed to meet precise client specifications. The
UDF Perforated Ceiling System provides mass-air displacement for a more uniform
distribution of clean air throughout a cleanroom environment and other
critically controlled areas. The UltraGuard HEPA/Fan Module Ceiling System is a
pressurized plenum system which utilizes a self-powered blower and HEPA filter
packaged together in one compact housing which can be installed in a suspended
ceiling grid.
The Company also manufactures and distributes several application
specific, modular cleanroom systems which are available in a number of
prepackaged sizes or can be customized to meet special requirements:
o The BioShield(TM) air-filtration unit, a health care product
introduced late in 1993, is an air scrubbing product for controlling airborne
pathogens. The product is targeted for the health care industry. The BioShield
product meets or exceeds the Center for Disease Control guidelines for hospital
isolation rooms, which require a minimum of 6 air changes per hour, which were
issued during the fourth quarter of 1994.
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o The Microlab(R) portable cleanroom can be set up by one person and be
operational within 30 minutes to provide Class 100 air for sanitized operations
such as animal studies, health care, hybrid electronics, and medical device
assembly. The Microlab unit's compact design fits through standard 36" doorways,
can be expanded by linking multiple units together where additional space is
required, and can be quickly moved to another location or folded and stored
until needed again.
o The CleanStation(R) single-pass softwall cleanroom is available in 15
sizes for Class 100, 1,000 or 10,000 air requirements and is designed for
customers with limited budgets requiring fast delivery and quick setup using
standard tools. The Flexi-JetTM system is an economical solution that supplies
HEPA-filtered Class 100 air to a large area for industrial and institutional
applications that require minimal dust and other airborne contaminants. The
BioLock(R) is a portable, transparent clean air isolation enclosure used for
temporary isolation needs. The PureZone(TM) product is specifically targeted to
the commercial market and can be wall-mounted or retrofitted on existing
furniture systems.
o The Company's Laminar Air Flow Patient Isolation technology is a
necessary component for bone marrow transplant procedures. The products consist
of modular components which can be managed in varied configurations to create a
room environment providing patient isolation. The evolution in design
refinements stems from more than a quarter million patient hours of experience.
The Company assembles the components at its Exton facility and the product is
then disassembled and reconstructed in the on-site hospital settings. The room
air is HEPA-filtered continually to provide maximum levels of cleanliness for
the patient.
Patents and Proprietary Rights
The Company has a number of patents, patent applications, patent
licenses and trademarks with respect to various air-filtration products. The
Company's issued patents and patent licenses expire between 2008 and 2011. The
Company believes that these patents and trademarks help differentiate the
Company's product offerings, but price and flexibility of product offerings are
equally important competitive factors.
Marketing and Distribution
The Company primarily conducts its sales and marketing activities for
its cleanroom and other indoor air quality products from its Airo Clean facility
located in Exton, Pennsylvania. The Company markets and sells these products to
a wide variety of end-users throughout the United States through a network of
independent dealers and manufacturers' representatives. Some of the dealers have
exclusive rights to sell the Company's air filtration products to specific
markets in a defined territory. Therefore, a territory servicing different
markets may have more than one dealer. These dealers are paid commissions for
product sales. Customers of cleanroom products include a variety of
manufacturing operations, including biomedical, microelectronics, medical
devices, pharmaceuticals, and the hospital and health care markets.
The Company's marketing activities seek to demonstrate the unique
applications and quality of its products. These activities include distribution
of sales literature, on-site demonstrations, direct mail programs, advertising,
publication of articles in the trade press and participation in industry
conferences and trade shows.
Airo Clean's marketing efforts have been targeted primarily to
end-users and facility managers for use in manufacturing applications. However,
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the Company anticipates expanding the marketing efforts for its air cleansing
devices to satisfy the increased demand for the prevention of infectious
contaminants in hospitals and for a variety of industrial applications.
Manufacturing
The Company's clean rooms and indoor air quality products are
manufactured in Exton, Pennsylvania. This manufacturing operation consists
primarily of an assembly process and testing of finished products.
Raw Materials and Supplies
The Company's air filtration products include specific filters, blowers
and electronic components that are assembled with steel assemblies and cabinets
which constitute the majority of the products. Some of these items are custom
made for the Company and require coordination from qualified vendors to assure
availability of various electronic and steel assemblies. If any supplier should
terminate its relationship for any reason, the Company anticipates that it will
be able to develop, or obtain from other sources, substitute components without
sustaining any material adverse effects.
Backlog
The backlog for the air quality segment was approximately $.8 million
at December 31, 1996, compared to approximately $2.4 million at December 31,
1995. The Company anticipates that this backlog will be fulfilled in 1997. The
decrease in backlog can be attributed to the completion of one significant clean
room project booked in December of 1995 and completed during 1996.
Backlog primarily represents firm accepted orders for air filtration
products. Although orders included in backlog may be canceled or rescheduled by
the customer, cancellations are uncommon and cancellation or restocking charges
may apply to a canceled order.
Seasonality
The air quality segment of the business is not seasonal.
Competition
The Company competes primarily in the hospital and health care segment
and the small to mid-size commercial and industrial applications segment of the
market for indoor air quality products. The Company's products are based on high
efficiency filtration systems, and are targeted at markets with strict air
purity requirements. There are a wide variety of companies providing services
similar to Airo Clean, and the market is very competitive. Competition is based
on price, ability of the products to satisfy specified air purity standards,
ability to customize products to meet specific customer needs, and reputation.
Management believes that the excellent long term reputation of Airo Clean and
its ability to provide customized solutions, combined with the growing number of
applications requiring air particle control, places the Company in a good
position to grow with the market and potentially improve its market share.
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U.S. Government Sales and Dependence on Significant Customers
Airo Clean does not sell any material amount of products to the U.S.
government. During 1996, one major clean room project accounted for
approximately 16% of the Company's consolidated revenues. This project has been
completed, and the Company does not anticipate that any customer will account
for more than 10% of consolidated revenues in 1997. Airo Clean has one
distributor located in Singapore which sells products in China and Southeast
Asia. The loss of this distributor might have a material adverse effect on Airo
Clean's business.
EMPLOYEES
As of December 31, 1996, the Company had 87 employees engaged in its
continuing operations. None of the Company's employees is represented by a labor
union. The Company considers its employee relations to be good and has never
experienced any work stoppages.
Item 1(d). Financial Information About Foreign and Domestic Operations and
Export Sales
The Company has sold all of its foreign operations. The Company's air
filtration products segment had approximately $760,000 of export sales through a
distributor in Singapore in 1996 and approximately $900,000 through this
distributor in 1995. In 1996, the Company also had an aggregate of approximately
$350,000 in revenues from two other foreign sales, one in Mexico and one in
Italy. These sales are U.S. dollar-denominated. The security systems segment
does not have export sales in its normal course of business, but may secure an
overseas project from time to time.
Item 1(e). Directors and Executive Officers of Registrant
Information about the Company's executive officers and directors can be
found in Part III of this report under "Item 10. Directors and Executive
Officers of Registrant."
Item 2. Properties
The Company's continuing operations are conducted primarily at its
headquarters facility in Exton, Pennsylvania, where its executive offices are
located. This facility occupies approximately 21,580 square feet of space.
Pursuant to a three year lease, commencing April 1, 1996 the Company pays a
monthly rental of $12,588 and a monthly operating expense allowance of $4,784,
which expense allowance is subject to adjustment. The Company believes that the
headquarters facility will be adequate for its present and anticipated purposes.
The Company also leases sales and support offices in Austin, Texas.
Item 3. Legal Proceedings
Maris is a named party to certain pending law suits relating to certain
of Maris' security system installation projects. In connection with Maris' 1995
settlement with its surety companies, the surety companies have assumed all
liabilities and all claims and counterclaims in respect of these law suits, and
the surety companies have agreed to release Maris from its indemnity obligations
to them.
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The Company and its subsidiaries are involved in various claims and
legal actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's results of operations, liquidity, or
consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Stockholders (the "Meeting") was
held on May 3, 1996.
(b) At the Meeting, each of the nominees for director, George E.
Mitchell, Anthony A. Nichols, Richard P. Richter and W. Wayne Dunlop
were elected to the Board of Directors by the affirmative vote of
9,201,905 shares, with 0 voting against and 3,900 withheld votes.
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PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
As of May 4, 1995, the Company's common stock was delisted from the
NASDAQ small-cap market. Since that date, there has been no established public
trading market for the common stock. The Company's common stock continues to be
quoted by a limited number of market makers on the NASD Electronic Bulletin
Board under the symbol "CCOR." There can be no assurance that there will be
regularly available quotations from market makers in the Company's common stock
in the future. The following are the high and low bid quotations for the
Company's common stock as quoted by NASDAQ through the second quarter of 1995
prior to delisting from NASDAQ, and as quoted on the Electronic Bulletin Board
for the third and fourth quarter of 1995 and for 1996.
1996 1995
High Low High Low
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First Quarter $.34 $.19 $.44 $.22
Second Quarter .69 .28 .34 .06
Third Quarter .53 .38 .48 .19
Fourth Quarter .25 .16 .28 .06
The above bid quotations reflect inter-dealer prices without mark-ups,
mark-downs or commissions and may not necessarily represent actual transactions.
There were 303 record holders of the Company's Common Stock on March
17, 1997. The Company has historically reinvested any earnings in the growth of
the business and has not paid cash dividends on its common stock.
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Item 6. Selected Financial Data
<TABLE>
<CAPTION>
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(In thousands, except per
share amounts) 1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Net sales $17,717 $17,663 $31,245 $15,242 $ --
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Net earnings (loss)
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Continuing operations (1,102) 52 (10,392) (113) --
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Discontinued operations -- ( 1,745) (703) 989
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Disposition of
discontinued operations 650 100 ( 3,303) -- --
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Net earnings (loss) (452) 152 (15,440) (816) 989
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Earnings (loss) per share
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Continuing operations ($.12) $ .01 ( 1.00) (.01) --
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Discontinued operations -- -- ( .17) (.07) .09
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Disposition of
discontinued operations .07 .01 ( .31) -- --
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Net earnings (loss) (.05) $ .02 ( 1.48) (.08) .09
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Working capital (deficit) 1,190 933 (11,379) 3,947 --
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Total assets 8,735 9,681 16,691 34,571 16,014
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Long-term debt 6,030 5,744 -0- 9,939 4,451
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Redeemable convertible
preferred stock 1,500 1,500 1,500 -- --
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Stockholders' equity
(deficit) (4,681) (4,229) (4,425) 10,236 11,078
======================================================================================================================
</TABLE>
Discontinued operations includes the furnishings segment and Nord Systems. No
cash dividends have been declared on common stock. Prior to 1993, the
furnishings segment constituted substantially all of the Company's operations.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
In 1995 the Company significantly downsized the Maris Equipment Company
("Maris") business by concentrating on the low voltage security and fire alarm
business and selected smart highway applications. The majority of net sales in
1994 represented bonded federal correctional facility and airport projects that
the Company has not pursued subsequent to 1994.
Due to declining furniture sales, particularly to the Federal
government, the Company decided in 1994 to dispose of the furnishings business.
On August 25, 1995, the Company completed the sale of the assets of the domestic
furnishings business, for cash and notes receivable. The Company has applied the
proceeds from the sale to pay down its bank debt. The Canadian operation was
sold to Safeguard Scientifics, Inc. in April 1995. Accordingly, the furnishings
segment has been presented as a discontinued operation.
In connection with the above described sale of the Company's
furnishings business, the Company changed its name to Core Technologies
(Pennsylvania), Inc.
In September 1995, Safeguard Scientifics (Delaware), Inc. contributed
to the capital of the Company 2,000,000 shares of the Company's Common Stock and
sold 2,500,000 shares of Common Stock to management. Prior to the above
transactions, Safeguard was the beneficial owner of 67% of the Company's
outstanding Common Stock. Subsequent to the above transactions, Safeguard became
the beneficial owner of 36% of the Company's outstanding Common Stock. The above
information regarding Safeguard's beneficial ownership of the Common Stock
assumes conversion of the 15,000 shares of the Company's Convertible Preferred
Stock which are convertible by Safeguard into 1,500,000 shares of Common Stock.
Continuing operations reflect the results of the on-going businesses of
Maris, which provides electronic security and life-safety systems to the
commercial, industrial and selected government marketplace, and Airo Clean,
which designs and manufacturers filtration systems for particle free
environments. Because of the disposition of the furnishings business and the
change in the focus of the Company's business, comparisons from year to year are
not necessarily meaningful.
The results of the Company in 1995 and 1996 continue to reflect the
negative impact of Maris contracts obtained prior to 1995 which the Company
anticipates will be completed by mid-year 1997. Projects obtained in 1995 and
1996 were secured at reasonable margins, but for the last two years the
Company's resources have been allocated toward finalizing old Maris contracts
with minimal or no margin contribution. The Company believes that the old Maris
contracts will have minimal impact on the Company's future operations, and the
Company is successfully building its backlog with reasonable margins.
Airo Clean had a record year in 1996 in both sales and earnings, which
was largely the result of completing a large clean room project.
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Review of continuing operations
Net sales were $17.7 million in 1996, $17.7 million in 1995 and $31.2
million in 1994. The Company reported a net loss from continuing operations of
$1.1 million in 1996, net earnings of $51,600 in 1995 and a net loss of $10.4
million in 1994. The Company also reported gains of $650,000 in 1996 and
$100,000 in 1995, and a loss of $5.0 million in 1994, from discontinued
operations. The gains on disposition of discontinued operations in 1996 and 1995
primarily related to certain amounts received in excess of amounts anticipated
upon disposition of the discontinued operations. Gross margins, as a percentage
of sales, were 21.5% in 1996, 24.9% in 1995 and (4.6%) in 1994. The negative
gross margin in 1994 reflects the losses incurred by Maris due to cost overruns
on the larger bonded federal correctional facility and airport projects.
Maris sales were $10.3 million in 1996, $13.0 million in 1995 and $27.2
million in 1994. The sales in 1994 included $16.2 million of bonded correctional
facility and airport projects which were subsequently turned over to bonding
companies. The sales decrease in 1996 reflects management's selective approach
in acquiring new projects and completing the existing backlog of projects at the
beginning of the year. Gross margins as a percentage of sales at Maris were
12.6% in 1996, 23.1% in 1995 and (8.4%) in 1994. The negative gross margin in
1994 reflects losses incurred to complete fixed-fee major correctional facility
and airport projects in process at the time of the September 1993 Maris
acquisition. In 1994, the Company recorded a provision for losses on
transferring the contracts to the surety companies of $2.2 million, more fully
discussed in note three to the financial statements. The reduced margin in 1996
from 1995, reflects the losses incurred on several highway monitoring projects
and additional costs to complete several other projects which were in the
backlog at the beginning of the year. The Company has filed claims for recovery
on some of these costs and the outcome is unknown at this time.
The Company has ceased bidding on Federal correctional facility and
certain airport projects. The following table summarizes correctional facility
and airport revenues and margins compared to all other revenues and margins for
1996, 1995 and 1994:
<TABLE>
<CAPTION>
Correctional
(In thousands) Facility and Airport All Other
-------------------------- ----------------------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales -- -- $ 16,185 $ 10,363 $ 12,987 $ 10,993
Cost of goods sold -- -- 19,763 9,053 9,982 9,689
Gross Margin % of sales -- -- (22.1%) 12.6% 23.1% 11.9%
</TABLE>
Airo Clean sales were $7.4 million in 1996, $4.7 million in 1995 and
$4.1 million in 1994. The increased sales in 1996 compared to 1995 can be
attributed to a $2.9 million clean room project. Gross margin, as a percentage
of sales, increased to 34.0% in 1996 compared to 29.9% in 1995 and 20.9% in
1994. Airo Clean's improved margins can be attributed to increased sales volume
and improved margins on its products and projects.
The sales effort at Airo Clean continues to focus on promoting the
BioShield, Ultraguard, and Laminar Air Flow products. These are air scrubbing
devices for controlling airborne contaminants and are targeted for the health
care and hospital industry. In 1995, Airo Clean acquired the Laminar Air Flow
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<PAGE>
patient product line from Isolation Technology Systems, a provider of sterile
cleanroom products to the health care and hospital industries. Laminar air flow
patient isolation is a necessary component of bone marrow transplant procedures,
and Airo Clean uses this product line to enhance its offering to the hospital
and health care markets.
Consolidated sales and marketing expenses were $1.8 million in 1996,
$1.7 million in 1995 and $3.3 million in 1994. These costs, as a percentage of
sales, were 10.2%, 9.5% and 10.6% in 1996, 1995 and 1994, respectively. These
costs increased moderately in 1996 due to the expansion of Airo Clean's sales
distribution system and decreased in 1995 due to cost reduction implemented at
Maris and Airo Clean. Sales efforts at Maris are being concentrated in expanding
the electronic security systems business to take advantage of the Company's
expertise and the higher profit potential.
Consolidated general and administrative expenses were $2.5 million in
1996, $2.2 million in 1995 and $4.5 million in 1994. These costs, as percentage
of sales, were 13.9% in 1996, 12.4% in 1995 and 14.4% in 1994. The increase
costs in 1996 reflect general corporate expenses which in 1995 and 1994 were
shared with discontinued operations. The absolute dollar decrease of $2.3
million in 1995 from 1994 reflects staff reductions and salary freezes
implemented at Maris and Airo Clean. The Company continues to closely monitor
and control costs and believes that additional sales can be achieved without a
proportional increase in business infrastructure.
During 1994, the Company restructured its security business which
resulted in a charge of $2.2 million in the statement of operations, more fully
described in note three to the financial statements.
Interest expense was $569,700 in 1996, $692,100 in 1995 and $593,400 in
1994. The decrease in 1996 reflects the lower average debt level due to cash
payments received in 1996 from the sale of the furnishing segment in 1995. The
increase in 1995 reflects the higher average debt level before the reduction in
debt due to sale of the furnishings segment of the Company and an increase in
the average interest rate.
The income tax benefit of $220,700 in 1995 and $1.7 million in 1994
principally reflects the benefit of recoverable U.S. income taxes as a result of
losses incurred. In addition, the Company has generated an operating loss
carryforward of approximately $7.7 million that may be used in future years to
offset taxable income until the year 2011, as more fully described in note
twelve to the financial statements.
The following table summarizes the approximate backlog as of December
31, 1996, 1995 and 1994:
(In Millions) MARIS AIRO CLEAN TOTAL
----- ---------- -----
1996 $4.0 $ .8 $ 4.8
1995 6.8 2.4 9.2
1994 9.2 1.4 10.6
The backlog at Maris has decreased during this period due to Management's
decision not to pursue larger federal correction projects. Airo Clean's backlog
reflects two significant cleanroom projects, one booked in the fourth quarter of
each of 1994 and 1995.
-13-
<PAGE>
Liquidity and Capital Resources
In March, 1997, the Company terminated its credit facility with its
previous lender and successfully negotiated a new three year, $6 million credit
agreement maturing on March 14, 2000. Borrowings under the Company's previous
credit facility were repaid with proceeds from the new facility. This credit
facility is secured by guarantees of $4.5 million in the form of a letter of
credit from Safeguard through September 30, 2000, as well as and substantially
all of the assets of the Company. Borrowings bear interest at prime plus 1% and
the Company pays a monthly commitment fee of 1/2% on the unused portion of the
credit facility. The Company believes that the combination of Safeguard's letter
of credit and the working capital assets of the Company's on going business will
be sufficient to satisfy or support the debt. As of March 17, 1997 outstanding
borrowings under the credit facility were $4.7 million.
In August 1995, as a result of the sale of the furnishings business,
$2.3 million of cash was applied to reduce outstanding bank borrowings. In
addition to the cash consideration at close, the Company received a $2.0 million
Subordinate Note which bears interest at a rate of 8% per annum as well as
installment payments payable in 1996. In 1996, the Company received an aggregate
of $1.2 million in cash consisting of installment payments from the buyer and
collections of receivables assigned back to the Company from the buyer. Interest
began accruing on the Subordinate Note on August 25, 1996. The principal amount
of the Subordinate Note is being amortized on a seven-year level schedule with
semi-annual payments and a balloon payment due on August 25, 2000. The first
semi-annual payment on the Subordinate Note was made on February 25, 1997.
In 1995, the Company entered into an agreement with the parties from
whom it acquired Maris, which significantly restructured the original purchase
transaction. Under this agreement the seller has agreed to offset its $3.6
million note receivable from the Company in exchange for releases from its
indemnification liabilities to the Company under the original asset purchase
agreement. The principal sureties have released the Company from its indemnity
obligations under certain construction projects in return for 300,000 shares of
Core Technologies stock, cash payments of $487,000 and additional payments of up
to $1 million in the aggregate equal to 20% of Maris' net earnings in 1998-2002.
The Company has negotiated terms with its principal vendors to supply the
materials needed to meet current requirements.
Safeguard made cash advances to the Company in 1995 totaling $887,000
to cover the closing costs of the sale of the furnishings segment and the cash
payments to the sureties. The Company has issued Safeguard a Subordinated Note
to evidence this debt. This Subordinated Note accrues interest at 6% per annum.
Accrued interest and principal are due on December 31, 2000. This Note is
subordinated to the Company's obligations to its other lenders. Additionally, if
the Safeguard letter of credit can be cancelled prior to December 31, 2000,
Safeguard has agreed to forgive all obligations under the Subordinated Note.
During 1996 and 1995, the Company received $1.3 million and $1.9
million, respectively in cash from discontinued operations. The Company
anticipates receiving approximately $480,000 in cash from discontinued
operations in 1997, primarily related to payment of the Subordinate Note
receivable from the buyer of its furnishings business, discussed above.
As a result of the restructurings, the Company has emerged as a
significantly downsized company. The Company believes that with its new credit
facility, which provides the Company with additional working capital on more
favorable terms than the previous credit facility, and cash provided by
-14-
<PAGE>
operations, it will be able to continue to operate in this downsized mode.
The Company will continue to focus on management of working capital and
controlling expenses to minimize the need to utilize availability under the new
credit facility.
Capital expenditures were $153,000 in 1996, $182,900 in 1995 and
$113,500 in 1994. The 1996 and 1995 expenditures were primarily used to upgrade
computer systems in Maris and Airo Clean. Capital expenditures for 1997 are
projected at approximately $150,000 with no formal commitments as of December
31, 1996.
Item 8. Financial Statements
The consolidated financial statements and schedule appear at the end
of this report beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-15-
<PAGE>
PART III
Item 10. Directors and Executive Officers of Registrant
Executive Officers:
The following persons were executive officers of the Registrant at
March 26, 1997:
<TABLE>
<CAPTION>
Has Been an
Officer
Name Age Since Position
- ---- --- ----- --------
<S> <C> <C> <C>
George E. Mitchell 59 1984 President, Chairman and
Chief Executive Officer
Frederick B. Franks, III(1) 57 1989 Vice President-Finance, Chief
Financial Officer, Treasurer and
Secretary
Michael Pelosi III(2) 39 1994 President, Airo Clean, Inc.
</TABLE>
(1) Mr. Franks joined the Company in May 1989. From March 1981 to April 1989,
Mr. Franks served as Vice President-Finance and Chief Financial Officer of
Ferag, Inc., a manufacturer of newspaper material handling equipment.
(2) Mr. Pelosi joined Airo Clean in 1981, and became Sales and Marketing
Director in 1985. He was appointed President in 1989.
-16-
<PAGE>
Directors:
<TABLE>
<CAPTION>
Has Been
Principal Occupation and Business a Director
Name Experience During Last Five Years Since Age
---- --------------------------------- ----- ---
<S> <C> <C> <C>
George E. Mitchell President, Chairman and Chief Executive
Officer of the Company 1984 59
Anthony A. Nichols Chairman, Brandywine Realty Trust, a real estate
investment trust.(1)(2)(4) 1988 57
Richard P. Richter President Emeritus, Ursinus College(1)(3)(5) 1989 66
W. Wayne Dunlop Executive Vice President and Chief Operating 1995 50
Officer, Barclay White, Inc., a general
construction contracting and management
firm(1)(6)
</TABLE>
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Stock Option Committee.
(4) Prior to August, 1996, Mr. Nichols was President of the Nichols Company,
an owner and manager of commercial office and industrial space.
(5) Prior to January 1, 1995, Mr. Richter was President of Ursinus College.
(6) Mr. Dunlop has been Chief Operating Officer of Barclay White since
September 1995 and Executive Vice President since September 1994. Prior to
September 1994 he was a Senior Vice President of Barclay White.
Disclosure of Delinquent Filers Pursuant to Item 405 of Regulation S-K:
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities ("10%
Stockholders") to file reports of ownership and changes in ownership of Common
Stock and other equity securities of the Company with the Securities and
Exchange Commission ("SEC"). Officers, directors and 10% Stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
received by it and written representations from certain reporting persons that
no other reports were required for those persons, the Company believes that
during the period from January 1, 1996 to December 31, 1996, all Section 16(a)
filing requirements applicable to its officers, directors and 10% Stockholders
were complied with, except for one late Form 4 filed by Mr. Franks relating to
expiration of options.
-17-
<PAGE>
Item 11. Executive Compensation
REPORT OF THE BOARD COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors (the "Committee")
determines compensation levels, including incentive compensation, for the
executives of the Company. Anthony A. Nichols is presently serving as the sole
member of the Compensation Committee.
Executive Compensation Policies
The Company was and is in a highly competitive industry. In order to
succeed, the Company believes that it must be able to attract and retain
qualified executives, promote among them the economic benefits of stock
ownership in the Company, and motivate and reward executives who, by their
industry, loyalty and exceptional service, make contributions of special
importance to the success of the business of the Company. The Company has
structured its executive compensation program to support the strategic goals and
objectives of the Company.
Base compensation levels and benefits for executives generally had been
set in previous years to be between the lower end and the midpoint of the scale
of compensation paid by comparable companies in the Company's principal
industry. Conversely, incentive programs were regarded to be above the midpoint
of the scale in the industry. In pursuing this philosophy, the Company believed
it could keep the fixed component of the compensation package at reasonable
levels while incenting its key executives and managers to achieve better than
average results. Therefore, the total cash compensation plan is made up of a
lower base and higher incentive opportunity which in total would be competitive
with comparable companies in the industry if the Company's objectives are
achieved. For the purpose of establishing these levels, the Company had reviewed
an evaluation by an independent compensation consultant of various published
industry salary surveys. In setting executive compensation packages for 1995 and
1996, the Committee considered an evaluation of executive compensation levels
for comparably-sized companies in the electrical contracting industry.
Annual cash bonuses in 1996 were, and in 1997 will be based on Company
income and individual goals. At the beginning of each year, the Committee
approves a target range of income, and a range of potential bonus amounts for
the chief executive officer and each other executive officer, stated as a
percentage of base salary. Performance bonuses are awarded at year-end based on
the actual income compared to the target income, and the achievement of
individual objectives and individual contributions during the year to the
achievement by the Company of its financial and strategic objectives, which the
Board determines in its discretion.
Grants of Company stock options are intended to align the interests of
executives and key employees with the long-term interests of the Company's
stockholders, and to encourage executives and key employees to remain in the
Company's employ. Generally, grants are not made in every year, but are awarded
subjectively based on a number of factors, including the pre-tax operating
earnings of the Company, the individual's contributions to the achievement of
the Company's financial and strategic objectives, and the amount and remaining
term of options already held by an individual. The Stock Option Committee of the
Board administers the Company's stock option plan. In 1996, options for 25,000
shares were granted to Michael H. Pelosi, III and options for 30,000 shares were
issued to Frederick B. Franks, III. See "Stock Options," below.
-18-
<PAGE>
CEO Compensation
In 1994, the Compensation Committee authorized an increase in Mr.
Mitchell's base salary to $140,000. However, based on the Company's performance
during the first quarter and its cash flow problems, in April 1994, Mr. Mitchell
initiated a 16% reduction in his salary in order to conserve Company resources.
Mr. Mitchell continued to draw base salary at this reduced level in 1995. A
payment of $25,000 was made to Mr. Mitchell in March, 1996, to partially
compensate him for the salary foregone in 1994 and 1995. Since the Company
failed to achieve the established target range of return on assets during 1995
and 1996, no bonus was paid to him for 1995 or 1996.
Other Executive Compensation
The Compensation Committee re-set executive salaries for 1994 for
certain executives based on its review of executive compensation in the
electrical contracting industry. Mr. Pelosi's compensation is governed by a
five-year employment agreement, and his salary was not adjusted. However, based
on the Company's performance during the first quarter and its cash flow
problems, in April and May 1994, all executives accepted salary reductions in
order to conserve Company resources. Mr. Pelosi (but no other executive
officers) received a bonus in 1995 and 1996. Mr. Franks received a payment of
$16,000 in March, 1996, to compensate him for salary foregone in 1994 and 1995.
By the Compensation Committee:
Anthony A. Nichols
EXECUTIVE COMPENSATION
Summary Compensation of Executive Officers
The following table sets forth information concerning compensation paid
to the Chief Executive Officer and to each other person who was an executive
officer of the Company at any time during 1995 and whose salary and bonus
exceeded $100,000 in 1996.
-19-
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation Compensation
------------------------------------------------- -----------------
Awards
-----------------
Securities
Other Annual Underlying All Other
Compensation Options/ Compensa-
Name and Principal Position Year Salary ($)(1) Bonus ($) ($)(2) SARS (#) tion ($)(3)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
George E. Mitchell, (4) 1996 $117,600 $ 0 $18,331 0 $33,170
President, Chairman and 1995 142,600 0 17,733 0 32,106
Chief Executive Officer 1994 125,354 0 13,816 0 33,787
- ------------------------------------------------------------ -----------------------------------------------------------------
Michael H. Pelosi III, (5) 1996 $100,000 $ 75,000 $ 0 25,000 $37,500
President, Airo Clean, Inc. 1995 99,801 5,465 0 50,000 37,500
1994 93,461 0 0 0 37,500
- -----------------------------------------------------------------------------------------------------------------------------
Frederick B. Franks, III (4) 1996 $100,000 0 $11,552 30,000 $18,222
Vice President-Finance 1995 108,154 0 11,194 0 17,587
and Chief Financial Officer 1994 92,154 0 7,491 0 17,747
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes annual compensation which has been deferred by the named
executives pursuant to the Company's 401(k) Tax Deferred Retirement and
Incentive Plan ("401(k) Plan").
(2) Represents amounts reimbursed during the fiscal year for the payment of
taxes. Perquisites and other personal benefits did not exceed the lesser of
$50,000 or 10% of any executive officer's salary and bonus and accordingly
have been omitted from the table as permitted by the rules of the
Securities and Exchange Commission.
(3) The stated amounts for fiscal 1996 include the following amounts for each
named executive officer: Company contributions under the 401(k) Plan -- Mr.
Mitchell, $0; Mr. Pelosi, $0; Mr. Franks, $0; term life and disability
premiums -- Mr. Mitchell, $26,589; Mr. Pelosi, $0; Mr. Franks, $14,536;
current dollar value of benefits to the named executives of the remainder
of split-dollar premiums paid by the Company -- Mr. Mitchell, $6,581; Mr.
Pelosi, $0; Mr. Franks, $3,686. residual salary payments agreed to in
connection with acquisition -- Mr. Mitchell, $0; Mr. Pelosi, $37,500; Mr.
Franks, $0.
(4) 1995 figure includes salary adjustment paid on March 15, 1996 to: Mr.
Mitchell, $25,000 and Mr. Franks, $16,000.
(5) Mr. Pelosi was elected as an executive officer of the Company in mid-1994.
-20-
<PAGE>
Stock Options
The following table sets forth information with respect to the number
of unexercised options and the value of unexercised in-the-money options at
December 31, 1996.
Aggregated Option/SAR Exercises in Last Fiscal Year and
FY-End Option/SAR Values
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Number of Securities Underlying
Shares Unexercised Value of Unexercised
Acquired Options/SARs at Fiscal Year-End in-the-Money Options/SARs
on (#)(1) at Fiscal Year-End ($)(1)
Exercise Value
Name (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
George E. Mitchell 0 $ 0 0 0 $ 0 $ 0
- --------------------------------------------------------------------------------------------------------------------------------
Michael H. Pelosi III 0 $ 0 51,500 62,500 $ 0 $ 0
- --------------------------------------------------------------------------------------------------------------------------------
Frederick B. Franks III 0 $ 0 50,000 30,000 $ 0 $ 0
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On December 31, 1996, the fair market value of the common stock was $.26.
No options were in-the-money on that date.
During Fiscal Year 1996, Mr. Pelosi was granted options to purchase
25,000 shares, and Mr. Franks was granted options for 30,000 shares, of the
Company's common stock under the Company's 1993 Stock Option Plan. These options
were issued at the market price on the date of grant, expire seven years after
the date of grant, and vest in twenty-five percent increments annually beginning
one year from the date of grant. No options were granted to the Company's Chief
Executive Officer in 1996. The following table sets forth certain information
regarding the options granted to Mr. Pelosi and Mr. Franks in 1996:
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
===================================================================================================================================
Potential Realizable Value
at Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term
===================================================================================================================================
% of Total
Number of Options/
Securities SARs Exercise
Underlying Granted to or Base
Options/SARs Employees in Price Expiration
Name Granted Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael H. Pelosi, III 25,000 4.7% $.26 12/16/03 $2,646 $ 6,617
- -----------------------------------------------------------------------------------------------------------------------------------
15,000 2.8% $.45 05/03/02 $2,748 $ 6,403
Frederick B. Franks, III 15,000 2.8% $.26 12/16/02 $1,587 $ 3,670
------ ---- ------ -------
30,000 5.6% $4,335 $14,408
===================================================================================================================================
</TABLE>
-21-
<PAGE>
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements.
In connection with the acquisition of the assets of Airo Clean
Engineering, Inc. in 1993, Airo Clean, Inc. entered into a five-year employment
agreement with Michael H. Pelosi III providing for his employment through
February 1, 1998 as President of Airo Clean, Inc. at a minimum base salary of
$100,000. Mr. Pelosi has also received residual salary payments agreed to in
connection with the acquisition of $37,500 per year, terminating with 1996. The
agreement also provided for Mr. Pelosi to receive an incentive payment each year
equal to 3.75% of Airo Clean's net income, before allocated expenses and taxes,
in excess of $150,000 per year. In 1996, Mr. Pelosi orally agreed to replace
this bonus formula with a plan similar to the bonus plan used for the Company's
other executive officers. This plan consists of a formula based on pre-tax
earnings of Airo Clean, and individual goals evaluated in the discretion of the
Board. Airo Clean did not achieve this target in 1994, and consequently Mr.
Pelosi did not receive any incentive payment for 1994. In May 1994, in
recognition of the Company's liquidity problems, Mr. Pelosi accepted a temporary
salary reduction for the balance of 1994 in order to conserve Company resources.
In 1995, Airo Clean did achieve its target and Mr. Pelosi received a bonus of
$5,465. Mr. Pelosi received a bonus of $75,000 in 1996 under his new bonus plan.
Upon the termination of Mr. Pelosi's employment for reasons other than just
cause or voluntary resignation, he will be entitled to receive an amount equal
to his base salary for the balance of the term of the agreement. Pursuant to
this agreement, Mr. Pelosi has agreed to refrain from competing with the Company
until the earlier of February 1, 1998 or two years after the termination of his
employment.
-22-
<PAGE>
STOCK PERFORMANCE GRAPH
The following chart compares the cumulative total stockholder return on
the Company's Common Stock for the period December 31, 1991 through December 31,
1996 with the cumulative total return on the NASDAQ Index and the cumulative
total return for a peer group index for the same period. Because the Company has
discontinued its furnishings operations, the Company has selected as a new peer
group SIC Code 1731--Electrical Contractors, which is the primary industry in
which the Company is continuing to operate.
220.00|-----------------------------------------------------------------------|
| |
| |
200.00|---------------------------------------------------------------------@-|
| |
| |
180.00|-----------------------------------------------------------------------|
| |
| |
160.00|-------------------------------------------------------@---------------|
| * |
| |
140.00|-----------------------------------------------------------------------|
| |
| @ |
120.00|--------------------------@--------------------------------------------|
| |
| * |
100.00|*#@---------@----------------------------------------------------------|
| |
| |
80.00|-----------------------------------------------------------------------|
| * |
| |
60.00|-----------------------------------------------------------------------|
| |
| |
40.00|---------------------------------------------------------------------*-|
| * |
| # |
20.00|-----------------------------------------------------------------------|
| |
| # # # |
0.00|-----------------------------------------#-----------------------------|
1991 1992 1993 1994 1995 1996
FISCAL YEAR ENDING
<TABLE>
<CAPTION>
COMPANY 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
CORE TECHNOLOGIES, INC. * 100 112.50 150.00 75.00 37.50 40.00
INDUSTRY INDEX # 100 27.57 8.21 2.96 4.66 5.59
BROAD MARKET @ 100 100.98 121.13 127.17 164.96 204.98
</TABLE>
THE INDUSTRY INDEX CHOSEN WAS: THE BROAD MARKET INDEX CHOSEN WAS:
SIC CODE 1731 -- ELECTRICAL WORK NASDAQ MARKET INDEX
THE CURRENT COMPOSITION OF THE INDUSTRY INDEX IS AS FOLLOWS:
EMCOR GROUP INC
ENSEC INTERNAT INC
LAYNE CHRISTENSEN CO
TELETEK INC
The above chart assumes that $100 was invested on December 31, 1990 in the
Company's Common Stock and in each of the comparison groups, and assumes
reinvestment of dividends.
Directors' Compensation
Directors are elected annually and hold office until their successors
are elected and have qualified or until their earlier resignation or removal.
Directors who are not employees of the Company are paid a quarterly fee of
$1,000 and $400 for each Board meeting attended, including committee meetings
attended on a date other than a Board meeting date.
The Company also maintains a stock option plan for Non-Employee
Directors (the "Directors' Plan") which provides for the grant of options to
directors not otherwise employed by the Company, its parent or any of its
subsidiaries ("Eligible Director"). Each Eligible Director receives, as of the
date such person first becomes an Eligible Director, an option to purchase 5,000
shares of the Company's Common Stock at an option exercise price equal to the
fair market value of the Common Stock on the date of grant. All options granted
under the Directors' Plan vest in four equal annual installments beginning on
the first anniversary of the date of option grant and have a term of seven
years. During 1996, Mr. Nichols and Mr. Richter were each granted options for
10,000 shares of the Company's common stock exercisable at $.26 per share; Mr.
Dunlop was granted options for 5,000 shares at $.25 per share and 5,000 shares
at $.26 per share. No options were exercised by any Eligible Director during
1995.
-23-
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of March 1, 1997, the Company's
Common Stock beneficially owned by each person known to the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, and the number
of shares of Common Stock owned beneficially by each director, by each named
executive officer, and by all executive officers and directors as a group. In
addition to the information regarding the Company's Common Stock listed below,
as of March 1, 1997, there were 15,000 Series A Shares issued and outstanding.
All of such Series A Shares are owned of record by Safeguard Scientifics
(Delaware), Inc., a wholly owned subsidiary of Safeguard Scientifics, Inc.
("Safeguard"), and consequently are beneficially owned by Safeguard.
Number of Percent of
Shares Owned(1) Class
--------------- ----------
Safeguard Scientifics (Delaware), Inc. (2)..... 3,744,757 36.0%
103 Springer Building
3411 Silverside Road
Wilmington, DE 19803
Philip J. Donnelly ............................ 833,333 9.4%
110 Summit Drive
Exton, PA 19341
George E. Mitchell (3)......................... 1,505,834 16.9%
110 Summit Drive
Exton, PA 19341
Frederick B. Franks (4) ....................... 892,083 10.0%
110 Summit Drive
Exton, PA 19341
W. Wayne Dunlop (4) ........................... 1,250 *
Anthony A. Nichols (4)......................... 25,938 *
Richard P. Richter (4)......................... 1,350 *
Michael H. Pelosi III(4)....................... 67,500 *
Officers and directors
as a group (7 persons)(5)................... 3,327,288 37.0%
- --------------------------------
(*) Less than 1%.
(1) Except as otherwise disclosed, the nature of beneficial ownership is the
sole power to vote and to dispose of the shares (except for shares held
jointly with spouse). 233,334 shares owned by Mr. Mitchell, and 233,333
shares each held by Mr. Franks and Mr. Donnelly, are redeemable by the
Company to satisfy exercises of employee stock options. See Item 13.
(2) Safeguard Scientifics (Delaware), Inc. is the record owner of 2,244,757
shares of Common Stock and 15,000 Series A Shares, which are presently
convertible into 1,500,000 shares of Common Stock. Such shares are
beneficially owned by Safeguard. All of the shares beneficially owned by
Safeguard have been pledged by Safeguard as collateral in connection with
its bank line of credit.
(3) Includes 300,000 shares of Common Stock held by Mr. Mitchell's spouse.
-24-
<PAGE>
(4) Includes for Messrs. Franks, Dunlop, Nichols, Richter and Pelosi 53,750,
1,250, 1,250, 1,250 shares and 57,500 shares, respectively, which may be
acquired pursuant to stock options which are currently exercisable or which
will become exercisable by May 28, 1997.
(5) Includes 115,000 shares which may be acquired pursuant to stock options
which are currently exercisable or which will become exercisable by May 28,
1997. Includes, for purposes of this table, shares owned by Mr. Donnelly, a
Vice President of the Company. The Company has not designated Mr. Donnelly
as a policy-making executive officer for purposes of Section 16 of the
Exchange Act of 1934 and the regulations thereunder.
Item 13. Certain Relationships and Related Transactions
The Company rents 21,580 square feet of office space used as its
headquarters in Exton, Pennsylvania. Prior to the third quarter of 1996, this
facility was owned by Safeguard; it has subsequently been transfered to
Brandywine Realty Trust, a Real Estate Investment Trust of which Anthony
Nichols, a director of the Company, is Chaiman. From April 1, 1995 through April
1, 1996, this facility was leased from Safeguard on a month to month basis with
monthly rental payments of $11,539 and a monthly operating expense allowance of
$4,784, which expense allowance is subject to adjustment based upon the
Company's proportionate share of actual operating expenses. Beginning April 1,
1996, the Company paid a monthly rental of $12,588 plus the monthly operating
expenses. The Company believes the lease terms are no less favorable than could
be obtained from an unrelated third party.
Prior to April 1, 1995, the Company also rented 4,600 sq. feet of
office space in Exton, Pennsylvania from Safeguard. The Company paid monthly
rental to Safeguard of $3,067 per month and an operating expense allowance of
$1,303 per month prior to the termination of the lease. All amounts paid to
Safeguard under the lease for this property have been charged to discontinued
operations on the Company's financial statements.
Safeguard currently has in place letters of credit in the aggregate
amount of $4,500,000 to guaranty the Company's bank loans through September 30,
2000. Safeguard has guaranteed varying amounts of the Company's debt in the
past. Safeguard received no monetary compensation for the extension of these
guarantees. The Company has agreed to indemnify Safeguard against loss resulting
from the above described guarantees.
In June 1994, Safeguard purchased from the Company 15,000 shares of its
Series A Redeemable Convertible Preferred Stock ("Series A Shares") for an
aggregate purchase price of $1.5 million. The Series A Shares are convertible
into shares of Common Stock based on a conversion price of $1.00 per share of
Common Stock. The conversion price and number of shares into which the Series A
Shares may be converted are subject to anti-dilutive adjustments. The Series A
Shares are entitled to a 6% per annum dividend payable out of legally available
funds. Dividends which are not declared and paid will accumulate. No dividends
have been declared to date. Unpaid, undeclared cumulative dividends as of
December 31, 1996 were $225,000. The Series A Shares are entitled to one vote
for each share of Common Stock into which such Series A Shares may be converted.
The Company may redeem the Series A Shares at any time and must redeem all
outstanding Series A Shares on June 1, 2001.
In March 1995, the Company sold all of the capital stock of CenterCore
Canada Limited to Safeguard for $10,000. CenterCore Canada had an intercompany
liability to the Company of approximately $369,300, which liability survived the
-25-
<PAGE>
stock sale. In February, 1996, Safeguard sold the assets of Safeguard Canada for
a cash payment of $100,000 U.S. plus contingent deferred payments equal to three
percent of the purchaser's annual consolidated revenues from all or any part of
the business or assets sold to the purchaser in the years 1996 through 2000, up
to a maximum aggregate of $100,000. The debt between CenterCore Canada and the
Company was satisfied by CenterCore Canada's assignment to the Company of the
cash proceeds and the rights to the contingent deferred payments.
Effective September 29, 1995, Safeguard contributed to the capital of
the Company 2,000,000 shares of the Company's common stock and sold to Mr.
Mitchell, Mr. Franks and Philip J. Donnelly, a Vice President of the Company, an
aggregate of 2,500,000 shares of the Company's common stock, at a price of $.10
per share, payable in the form of a five year, interest-bearing promissory note.
The promissory notes bear interest at a rate of 6.35% per annum and are payable
in full upon the maturity date, September 29, 2000. Each individual is required,
however, to prepay the outstanding balance to the extent of 25% of the proceeds
of any sale or other disposition of any of the shares purchased from Safeguard.
The parties estimated the fair market value of the shares to be $.10 as of the
date of issue, taking into account a discount for lack of liquidity, after the
common stock of the Company was delisted from NASDAQ.
Mr. Mitchell, Mr. Franks and Mr. Donnelly have entered into an
agreement with the Company pursuant to which they have deposited an aggregate of
700,000 of the shares acquired from Safeguard into escrow with the Company. The
Company may redeem these escrowed shares in order to satisfy exercises of
options under the Company's 1993 Stock Option Plan. The redemption price payable
by the Company will be equal to the exercise price payable by the individual
exercising the option.
In 1995, Safeguard advanced $887,000 to the Company to cover closing
costs of the sale of the furnishings business and payments to Maris' sureties.
The Company has issued to Safeguard a Subordinated Note to evidence this
obligation. The Subordinated Note accrues interest at 6% per annum. Interest and
principal are due on December 31, 2000 but the Subordinated Note is subordinated
to all the Company's obligations to its other lenders. Additionally, if the
Safeguard letter of credit can be cancelled prior to December 31, 2000,
Safeguard has agreed forgive all obligations under the Subordinated Note.
In connection with the Airo Clean acquisition in 1993, Airo Clean, Inc.
entered into a five-year employment agreement with Joseph P. Pelosi, the brother
of Michael H. Pelosi, III. The agreement provides for a minimum annual base
salary of $80,000, and provides for an incentive payment each year equal to
3.75% of Airo Clean's net income, before allocated expenses and taxes, in excess
of $150,000. During 1994, the Company paid Joseph Pelosi $80,000 plus normal
employee benefits. Joseph Pelosi, as well as Michael H. Pelosi, has accepted a
change in bonus formula to a plan similar to that used for other executive
officers of the Company. See "Executive Compensation - Employment Contracts and
Termination of Employment and Change in Control Arrangements."
Also in connection with the Airo Clean acquisition, Airo Clean entered
into a lease for approximately 15,300 square feet of flex office, warehouse and
assembly space in Exton, PA from Michael Pelosi, Jr. and Lucille Pelosi, who are
the parents of Michael H. Pelosi, III. The lease continues through December
2001. During 1995, Airo Clean paid $110,000 as rent to Mr. and Mrs. Pelosi, and
also paid all operating expenses for the leased premises. The Company has
consolidated Airo Clean's operations into the Company's headquarters facility,
and sublet the Airo Clean space. Through the remaining term of the lease, the
rental paid by the sublettor will be $128,000 less than the rent to be paid by
the Company.
-26-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following Financial Statements and Schedule are included with this
Annual Report.
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(b) Reports on Form 8-K
During the fiscal quarter ended December 31, 1996, the Company did not
file any Reports on Form 8-K.
-27-
<PAGE>
(c) Exhibits
The following is a list of exhibits required by Item 601 of Regulation S-K
to be filed as part of this Report.
Exhibit No. Exhibit
- ----------- -------
3.1 Amended and Restated Certificate of Incorporation
3.2 By-Laws
4.1 Reference is made to Exhibit 3.1
4.2 Form of certificate representing the shares of Common Stock
4.3** Amended and Restated 1984 Stock Option Plan of CenterCore, Inc.
4.4** Stock Option Plan for Non-Employee Directors
4.5** 1993 Stock Option Plan
4.6 Certificate of Designation for Series A Preferred Stock
10.1 Loan and Security Agreement dated March 14, 1997 by and among Core
Technologies (Pennsylvania), Inc., Maris Equipment Co., Inc. and
Airo Clean, Inc. (Borrowers) and FINOVA Capital Corporation
(Lender)
10.2 $887,000 Subordinated Note from Core Technologies, Inc. to
Safeguard Scientifics (Delaware), Inc. dated August 25, 1995
10.3 Subordination Agreement dated March 14, 1997 between Safeguard
Scientifics (Delaware), Inc. and FINOVA Capital Corporation, and
acknowledged by Core Technologies (Pennsylvania), Inc.
10.4 Assignment and Assumption of Lease Agreement for 212 Phillips
Road, Lionville, PA dated as of February 1, 1993 between Airo
Clean Engineering, Inc. and Airo Clean Acquisition Corp.
10.5 Lease Agreement between CenterCore, Inc. and The Nichols Company
dated September 29, 1993 for 110 Summit Drive, Exton, PA and
Landlord's Waiver dated February 9, 1994
10.6 Lease Agreement between Maris Equipment Company and Chesco Nichols
Company dated July 23, 1986 for 110C Summit Drive, Exton, PA and
amendments thereto
-28-
<PAGE>
Exhibit No. Exhibit
- ----------- -------
10.7 Fourth Amendment to Lease
10.8** CenterCore, Inc. 401(k) Tax Deferred Retirement and Incentive Plan
10.9** CenterCore, Inc. 401(k) Tax Deferred Retirement and Incentive
Plan, Amendment 2-93
10.10** Third Amendment to the CenterCore, Inc. 401(k) Tax Deferred
Retirement and Incentive Plan effective as of June 1, 1994
10.11 Settlement Agreement between the Company and Joseph Pisarra dated
as of September 29, 1995
10.12 Asset Purchase Agreement dated February 1, 1993 between Airo Clean
Acquisition Corp. and Airo Clean Engineering, Inc. and Michael H.
Pelosi III, Joseph Pelosi and Michael H. Pelosi, Jr. (schedules
and exhibits omitted)
10.13** Employment Agreement dated February 1, 1993 between Airo Clean,
Inc. and Michael H. Pelosi, III
10.14 Exclusive License Agreement between Michael H. Pelosi III and Airo
Clean, Inc. dated as of February 1, 1993
10.15 Asset Purchase Agreement dated September 15, 1993 among MEC
Acquisition, Inc., CenterCore, Inc., Maris Equipment Company and
JWP Inc.
10.16 Promissory Note dated September 22, 1993 made by Maris Equipment
Company to JWP Inc.
10.17 Agreement and Release dated June 19, 1995 among CenterCore, Inc.,
Maris Equipment Company, Inc., Safeguard Scientifics, Inc., EMCOR
Group, Inc., JWP/MEC Corp., and Seaboard Surety Company
10.18 Agreement dated June 16, 1995 among CenterCore, Inc., Maris
Equipment Company, Inc., and Insurance Company of North America
10.19 Agreement dated June 19, 1995 among CenterCore, Inc., Maris
Equipment Company, Inc., and Liberty Mutual Insurance Company
10.20 $1.1 Million Note to Safeguard Scientifics, Inc. dated September
22, 1993
-29-
<PAGE>
Exhibit No. Exhibit
- ---------- -------
10.21 Subordination Agreement dated March 1994 among Maris Equipment
Company, Inc., JWP/MEC Corp., and Mellon Bank
10.22 Preferred Stock Purchase Agreement dated June 15, 1994 between
CenterCore, Inc. and Safeguard Scientifics (Delaware), Inc.
10.23 Asset Purchase Agreement dated May 26, 1995 among CenterCore,
Inc., Corel Corporate Seating, Inc. and The CenterCore Group, Inc.
10.24 Amendment No. 1 dated as of June 30, 1995 to Asset Purchase
Agreement
10.25 Option Shares Escrow Agreement dated September 29, 1995, by and
between George Mitchell, Frederick Franks III, Philip Donnelly and
the Company
10.26 Promissory Note dated September 29, 1995 from George Mitchell to
the Company in the principal amount of $83,333
10.27 Promissory Note dated September 29, 1995 from Frederick Franks III
to the Company in the principal amount of $83,333
10.28 Promissory Note dated September 29, 1995 from Philip Donnolly to
the Company in the principal amount of $83,333
11 Computation of Per Share Earnings (Loss)
21 List of Subsidiaries
23 Consent of Independent Auditors
- ----------------
** These exhibits relate to compensatory plans, contracts or arrangements
in which directors and/or executive officers of the registrant may
participate.
-30-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 1997 CORE TECHNOLOGIES (PENNSYLVANIA), INC.
By: /s/ George E. Mitchell
------------------------------------
George E. Mitchell
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name and Title Signature Date
-------------- --------- ----
<S> <C> <C>
George E. Mitchell
Chief Executive Officer and Director /s/ George E. Mitchell March 28, 1997
----------------------------------
Frederick B. Franks, III
Chief Financial Officer /s/ Frederick B. Franks, III March 28, 1997
----------------------------------
Anthony A. Nichols
Director /s/ Anthony A. Nichols March 28, 1997
----------------------------------
Richard P. Richter
Director /s/ Richard P. Richter March 28, 1997
----------------------------------
W. Wayne Dunlop
Director /s/ W. Wayne Dunlop March 28, 1997
----------------------------------
</TABLE>
-31-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Core Technologies (Pennsylvania), Inc.:
We have audited the consolidated balance sheets of Core Technologies
(Pennsylvania), Inc. and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of operations, stockholders' deficit and cash
flows for each of the years in the three-year period ended December 31, 1996. In
connection with our audit of these consolidated financial statements, we also
have audited the consolidated financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Core Technologies
(Pennsylvania), Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in coformity with generally accepted
accounting principles. Also, in our opinion, the related consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
February 28, 1997, except as to the first paragraph in
note 9 which is as of March 14, 1997
<PAGE>
CORE TECHNOLOGIES (PENNSYLVANIA), INC.
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash $ 124,200 $ 106,500
Receivables, less allowances ($180,000 --1996; $338,200 --1995) 4,171,500 3,709,700
Costs and estimated earnings in excess of billings on uncompleted contracts 511,000 401,300
Inventories 647,100 679,500
Notes receivable 280,300 848,200
Other current assets 360,900 871,500
------------ ------------
Total current assets 6,095,000 6,616,700
Plant and equipment
Leasehold improvements 167,100 168,200
Machinery and equipment 1,076,800 987,000
------------ ------------
1,243,900 1,155,200
Less accumulated depreciation and amortization (839,800) (652,900)
------------ ------------
Net plant and equipment 404,100 502,300
Other assets
Excess of cost over fair value of net assets of businesses acquired, net 535,800 583,900
Notes receivable 1,682,000 1,962,300
Other 18,400 15,500
------------ ------------
Total other assets 2,236,200 2,561,700
------------ ------------
$ 8,735,300 $ 9,680,700
============ ============
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable $ 3,172,500 $ 2,319,300
Accrued expenses 1,142,500 2,547,200
Billings in excess of costs and estimated earnings on uncompleted contracts 469,800 681,100
Current debt 120,000 136,600
------------ ------------
Total current liabilities 4,904,800 5,684,200
Long-term debt 5,143,000 4,857,200
Long-term debt - related party 887,000 887,000
Other liabilities 981,200 981,200
Redeemable convertible preferred stock issued to related party 1,500,000 1,500,000
Stockholders' deficit
Common stock, $.01 par value; Authorized -- 20,000,000 shares;
Issued - (9,217,326 shares--1996 and 1995) 92,200 92,200
Additional paid-in capital 7,983,900 7,983,900
Accumulated deficit (12,336,300) (11,884,500)
Treasury stock at cost - 330,000 shares (420,500) (420,500)
------------ ------------
Total stockholders' deficit (4,680,700) (4,228,900)
------------ ------------
$ 8,735,300 $ 9,680,700
============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE>
CORE TECHNOLOGIES (PENNSYLANIA), INC.
- --------------------------------------------------------------------------------
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 17,717,400 $ 17,663,400 $ 31,244,700
Cost of goods sold 13,904,600 13,261,400 32,668,200
------------ ------------ ------------
Gross profit (loss) 3,812,800 4,402,000 (1,423,500)
Expenses
Sales and marketing 1,801,600 1,681,700 3,310,000
General and administrative 2,468,300 2,197,300 4,488,200
Restructuring 2,239,900
Interest 569,700 692,100 593,400
------------ ------------ ------------
4,839,600 4,571,100 10,631,500
------------ ------------ ------------
Loss from continuing operations before provision for income taxes (1,026,800) (169,100) (12,055,000)
Provision for (benefit of) income taxes 75,000 (220,700) (1,662,900)
------------ ------------ ------------
Earnings (loss) from continuing operations (1,101,800) 51,600 (10,392,100)
Loss from discontinued operations (1,745,200)
Gain (loss) on disposition of discontinued operations 650,000 100,000 (3,302,800)
------------ ------------ ------------
Net earnings (loss) $ (451,800) $ 151,600 $(15,440,100)
============ ============ ============
Net earnings (loss) per share: - Primary
Continuing operations $ (.12) $ .01 $ (1.00)
Discontinued operations (.17)
Gain (loss) on disposition of discontinued operations .07 .01 (.31)
------------ ------------ ------------
Net earnings (loss) $ (.05) $ .02 $ (1.48)
============ ============ ============
Net earnings (loss) per share: - Assumming full dilution
Continuing operations $ (.12) $ .00 $ (1.00)
Discontinued operations (.17)
Gain (loss) on disposition of discontinued operations .07 .01 (.31)
------------ ------------ ------------
Net earnings (loss) $ (.05) $ .01 $ (1.48)
============ ============ ============
Weighted average common and common
equivalent shares outstanding:
Primary 8,887,000 10,112,000 10,437,000
Assuming full dilution 8,887,000 11,612,000 10,437,000
</TABLE>
See notes to consolidated financial statements
<PAGE>
CORE TECHNOLOGIES (PENNSYLVANIA), INC.
- -------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Retained Foreign
Common stock Additional earnings/ currency
----------------------- paid-in (accumulated translation Treasury
Shares Amount capital deficit) adjustment stock
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance --December 31, 1993 10,767,326 $ 107,700 $ 6,823,400 $ 3,404,000 $ 321,400 $ (420,500)
Net loss (15,440,100)
Note receivable contribution 1,100,000
Translation adjustment (196,800)
Write off translation adjustment (124,600)
------------ ------------ ------------ ------------ ------------ ------------
Balance --December 31, 1994 10,767,326 107,700 7,923,400 (12,036,100) (420,500)
Net earnings 151,600
Common stock contribution (2,000,000) (20,000) 20,000
Common stock issued 450,000 4,500 40,500
------------ ------------ ------------ ------------ ------------ ------------
Balance --December 31, 1995 9,217,326 92,200 7,983,900 (11,884,500) (420,500)
Net loss (451,800)
============ ============ ============ ============ ============ ============
Balance --December 31, 1996 9,217,326 $ 92,200 $ 7,983,900 $(12,336,300) $ $ (420,500)
============ ============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE>
CORE TECHNOLOGIES (PENNSYLVANIA), INC.
- -------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Operations
Net earnings (loss) $ (451,800) $ 151,600 $(15,440,100)
Adjustments to reconcile net earnings (loss) to cash from operations
Loss from discontinued operations 1,745,200
(Gain) loss on disposition of discontinued operations (650,000) (100,000) 3,302,800
Provision for restructuring 2,239,900
Depreciation and amortization 296,500 315,500 473,800
Decrease in deferred taxes (36,000)
Cash provided by discontinued operations 1,309,100 1,901,300 782,200
Cash provided by (used in) changes in working capital items
Receivables (461,800) 1,315,200 1,703,200
Inventories 32,400 (53,800) 501,400
Contracts in progress (321,000) (847,500) 856,500
Other current assets (41,300) (640,200) (68,900)
Accounts payable 853,200 (3,566,200) 326,300
Accrued expenses (735,900) (1,246,300) 1,673,900
Taxes on income 75,000 1,602,700 (1,719,300)
------------ ------------ ------------
Cash used by operations (95,600) (1,167,700) (3,659,100)
Financing activities
Issuance of preferred stock 1,500,000
Borrowings (repayments) of debt 269,200 (2,515,300) 2,773,700
------------ ------------ ------------
Cash provided (used) by financing activities 269,200 (2,515,300) 4,273,700
Investing activities
Expenditures for plant and equipment (153,000) (182,900) (113,500)
Proceeds from sale of discontinued operations 2,345,700
Other, net (2,900) 1,043,100 (294,400)
------------ ------------ ------------
Cash (used) provided by investing activities (155,900) 3,205,900 (407,900)
------------ ------------ ------------
Increase (decrease) in cash 17,700 (477,100) 206,700
Cash beginning of year 106,500 583,600 376,900
------------ ------------ ------------
Cash end of year $ 124,200 $ 106,500 $ 583,600
============ ============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
DESCRIPTION OF BUSINESS - The Company provides integration,
installation and servicing of advanced electronic security and fire alarm
systems in its major market areas. Work is generally performed under fixed fee
or unit price contracts as a subcontractor to the general contractor or as a
prime contractor to the owner. The Company also designs, manufactures and
distributes air filtration units, components and systems which are used in a
variety of industries which require particulate-free, ultra-clean, working
environments, as well as patient isolation devices for hospital and health care
applications.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Core Technologies (Pennsylvania), Inc. and its domestic,
wholly-owned subsidiaries (the Company). All significant intercompany accounts
and transactions have been eliminated. The furnishings segment of the Company
was disposed of in August 1995 and accordingly is reported as a discontinued
operation.
RETAINAGE RECEIVABLES AND PAYABLES under contracts are classified as
current assets and current liabilities. Retainage receivable under retainage
provision contracts at December 31, 1996 and 1995 were $148,400 and $415,900,
respectively. Retainage payable, under retainage provision contracts at December
31, 1996 and 1995, were $0 and $11,100, respectively.
INVENTORIES are valued at the lower of standard cost (which
approximates average cost) or market.
PLANT AND EQUIPMENT are carried at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets (leasehold
improvements - 5 years; machinery and equipment - 3 to 7 years).
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS OF BUSINESSES ACQUIRED and
other intangibles, related to its air filtration products segment, are amortized
on a straight-line basis primarily over 15 years. Assessment of the carrying
amount of goodwill and other intangibles is made when changing facts and
circumstances suggest that the carrying value of goodwill or other assets may be
impaired using the forecasted undiscounted cash flow from the related business
activity (including possible proceeds from a sale of the business). Accumulated
amortization at December 31, 1996, 1995 and 1994 was $184,500, $136,500 and
$88,400, respectively.
TAXES ON INCOME are accounted for using the asset and liability method.
Under this method, deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities. The effect on deferred taxes
of a change in tax rates is recognized in operations in the period that includes
the enactment date.
1
<PAGE>
CONTRACTING SALES are recognized using the percentage of completion
accounting method determined by the ratio of cost incurred to date on the
contract to management's estimate of the total contract cost. Provisions for
estimated losses on uncompleted contracts are recorded in the period in which
the losses are determined. Changes in estimated sales and costs are recognized
in the periods in which such estimates are revised.
SALES of air filtration products are recognized when product is shipped
and title or risk of loss is transferred. Revenue from installation services is
recognized when performed.
EARNINGS (LOSS) PER SHARE of common stock are computed on net earnings
(loss) using the weighted average number of shares outstanding during each
period, including common stock equivalents (unless antidilutive) which would
arise from the exercise of stock options. On a fully diluted basis, the weighted
average number of shares outstanding is adjusted to assume the conversion of the
convertible preferred stock ( unless antidilutive).
FINANCIAL INSTRUMENTS, principally accounts receivable, notes
receivable, and accounts payable are carried at cost which approximates fair
value due to the short maturity of these instruments. The Company's debt is
carried at cost which approximates fair value as the debt bears interest at
rates approximating current market rates.
USE OF ESTIMATES - The preparation of financial statements in
conformity with general accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Estimates made in the preparation of the accompanying financial statements
include the amount of reserves established for inventory and uncollectible
amounts included in accounts receivable and estimates used in costs to complete
contracts in progress.
STOCK OPTIONS - In 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-based Compensation (SFAS
123), which gives companies the option to adopt the fair value method for
expense recognition of employee stock options and stock based awards or to
continue to account for such items using the intrinsic value method as outlined
under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) with pro forma disclosures of net income and earnings per
share as if the fair value method had been applied. The Company has elected to
continue to apply APB 25 for stock options and stock based awards to employees
and has disclosed pro forma net income (loss) and pro forma earnings (loss) per
share as if the fair value method had been applied.
NEW ACCOUNTING STANDARDS - In 1996, the Company adopted Statement of
Financial Accounting Standards No. 121, Accounting for Impairment of Long-Lived
Assets to be Disposed Of. The adoption of this new statement had no impact on
the Company's consolidated financial position or results of operations.
RECLASSIFICATION - Certain reclassifications have been made to prior
year amounts to reflect consistency with 1996 classifications.
2
<PAGE>
2. Acquisitions
On September 22, 1993, the Company purchased substantially all of the
assets and certain liabilities of Maris Equipment Company (Maris), a
wholly-owned subsidiary of JWP, Inc. (JWP). The purchase price was a fixed
amount of $4.3 million plus a contingent payment. The fixed portion was funded
by a note payable to JWP for $3.95 million and $350,000 in cash at closing. The
acquisition was accounted for by the purchase method, and accordingly, the
purchase price was allocated to the assets acquired and the liabilities assumed
based on the estimated fair value at the date of acquisition. Excess of cost
over fair value of net assets of business acquired of $1,954,800 was recorded
(note 3).
3. Restructurings
Furnishings Segment
On August 25, 1995, the Company sold the assets of its furnishings
segment consisting of the business of designing, manufacturing and distributing
space-efficient, modular workstation systems and a line of complimentary office
products, including cable and wiring systems, ergonomically designed seating
products, and air management systems for temperature blending and breathing zone
filtration. The Company had conducted the furnishings segment directly, and
through its majority owned subsidiary, Corel Corporate Seating, Inc. (Corel).
The sales price was comprised of three components, determined based on the net
assets sold to The CenterCore Group, Inc., as follows: $2,345,700 in cash,
$1,695,500 in installment payments to be paid in 1996 and a $1,962,300
Subordinate Note, for an aggregate sales price of $6,003,500. The installment
payments in 1996 were reduced by $847,300 representing the amount of accounts
receivable not collected 120 days after closing plus a collection fee of
$50,000. The Subordinate Note bears interest at the rate of 8% per annum,
commencing on August 25, 1996. The principal amount of the Subordinate Note will
be amortized on a seven year level schedule with semi-annual payments, and with
a balloon payment due August 25, 2000. Interest and principal payments commenced
February 25, 1997 and continue semi-annually thereafter until maturity. The
Company issued 150,000 shares of common stock to the minority shareholder of
Corel in payment for its minority interest. The Canadian furnishings business
was sold to Safeguard Scientifics, Inc. (Note 8) who subsequently sold the
business to the Canadian management for $100,000 in cash and up to $100,000 in
payments based on net annual sales through the year ending December 31, 2000.
Proceeds of the earn-out from the Canadian sale will be remitted to the Company.
No amounts have been remitted through December 31, 1996. In 1994, the Company
recorded an anticipated loss of $3,302,800 related to the sale of these
businesses. Revenues for the furnishings segment, which are not included in
consolidated sales, for 1995 and 1994, were $20,152,200 and $34,088,200,
respectively.
During the year ended December 31, 1996 and 1995, the Company recorded
$650,000 and $100,000 respectively, in gains on disposition of discontinued
operations, primarily related to certain amounts received in excess of
anticipated amounts at the date of disposition of the discontinued operations.
3
<PAGE>
Security Systems Segment
In 1994, the Company continued to suffer reductions in the
profitability of fixed-fee contracts since its acquisition of Maris (Note 2) in
1993. This erosion was caused primarily by unforeseen costs and operational and
contract problems, which were exacerbated by insufficient financing to support
the timely performance of the affected contracts. As a result of this profit
degradation, the Company during 1994 was not able to pay its vendors on a timely
basis and had difficulty completing work in progress.
Most of the larger jobs affected by these issues were bonded and the
Company entered into agreements with the surety companies to have them assume
responsibility for completing their respective jobs. The Company has obtained
agreements with sureties releasing the Company from any financial obligations
with respect to completing the jobs in exchange for 300,000 shares of the
Company's stock and a cash settlement totaling $487,000.
The Company has agreed with the parties from whom it purchased Maris,
to restructure the original purchase transaction by offsetting its note
receivable from Maris of $3.6 million in exchange for releases from its
indemnification of liabilities to the Company under the original asset purchase
agreement and additional payments of 20% of Maris' net earnings in 1998-2002 up
to $1 million in the aggregate. The effective $3.6 million reduction in the note
payable net of the related write-off of $1.8 million of remaining costs in
excess of the fair value of net assets of business acquired recorded for the
Maris acquisition was reflected in the 1994 financial statements.
The financial effect of the above transfer of contracts to the surety
companies and the write-off of the goodwill is listed below:
(In thousands)
Accounts receivable $ 5,977
Costs and estimated earnings in excess of
billings on uncompleted contracts net 1,881
Payables (4,362)
Settlement with surety companies 487
Costs in excess of net assets of business acquired 1,794
Note payable (3,600)
Other 63
--------
Charge for restructuring $ 2,240
========
As of December 31, 1994 Safeguard contributed a note receivable from the
Company of $1.1 million as additional paid-in capital.
4
<PAGE>
4. Inventories
(In thousands) 1996 1995
---- ----
Raw materials....................... $300 $354
Work in progress 3 -
Finished goods...................... 344 326
---- ----
$647 $680
==== ====
5. Accrued Expenses
(In thousands) 1996 1995
---- ----
Commissions......................... $79 $29
Salaries............................ 322 342
Sales and Use Tax................... 142 586
Other............................... 600 1,590
------ ------
$1,143 $2,547
====== ======
6. Commitments and Contingencies
Maris is a named party to certain pending law suits relating to certain
of Maris' security system installation projects. Maris also believes that it has
certain claims with respect to other security systems installation projects for
which it has not filed lawsuits. In connection with Maris' settlement with its
surety companies, the surety companies have assumed all claims and all
liabilities in respect to these and potential law suits, and the surety
companies have agreed to release Maris from its indemnity obligations to them.
The Company is subject to other pending and threatened legal
proceedings and claims which have arisen in the ordinary course of business and
which have not been fully adjudicated. These actions, when ultimately concluded
and determined, will not, in the opinion of management, have a material effect
on the results of operations, liquidity, or the financial position of the
Company.
5
<PAGE>
7. Contracts in progress
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Costs incurred on uncompleted contracts $9,371 $25,218
Estimated earnings 2,155 4,180
---------------- ---------------
11,526 29,398
Billings to date (11,485) (29,678)
---------------- ---------------
$41 ($280)
================ ===============
</TABLE>
Such amounts are included in the accompanying consolidated balance sheets as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 511 $401
Billings in excess of costs and estimated earnings on
uncompleted contracts (470) (681)
---------------- ---------------
$41 ($280)
================ ===============
</TABLE>
8. Related Party Transactions
Safeguard Scientifics, Inc. (Safeguard) owns 25% of the outstanding
common stock of the Company at December 31, 1996 and all of the redeemable
convertible preferred stock. In 1995, Safeguard contributed 2 million common
shares to the Company and sold 2.5 million common shares to the management of
the Company and provided bank guarantees of $4.5 million in the form of a letter
of credit through September 30, 2000.
The Company and Safeguard were parties to an administrative services
agreement pursuant to which Safeguard provided the Company with administrative
support. In 1995, the administrative services agreement was terminated. Prior to
1995 the agreement for these administrative services was for a maximum annual
fee of $500,000 and the reimbursement of certain out-of-pocket expenses incurred
by Safeguard in performing services under the agreement. However, in conjunction
with the 1994 bank agreement, the fee was reduced to $300,000 retroactive to
January 1, 1994, and payment of the fee was to be made subject to the Company's
satisfaction of certain requirements under its bank agreement which the Company
was not able to satisfy. Therefore, no payments were made or are owing under
this agreement after December 31, 1994. The Company made payments of $83,333 to
Safeguard and accrued the remaining fees of $216,667 in 1994. The amount charged
to continuing operations was $0 in 1996 and 1995, and $220,000 in 1994. The
balance of these fees were charged to discontinued operations.
During 1994 Safeguard purchased 15,000 shares of redeemable convertible
preferred stock for $1.5 million. The preferred stock has a stated value of $100
per share and entitles
6
<PAGE>
holders to quarterly dividends of $1.50 per share commencing on July 1, 1994.
Unpaid undeclared cumulative dividends were $225,000 and $135,000 as of December
31, 1996 and 1995, respectively. The Company may redeem all outstanding
preferred stock any time after June 1, 1995 at the stated value plus any unpaid
dividends. However, the preferred stock must be redeemed prior to June 1, 2001.
The preferred stock is convertible at any time into shares of the Company
common stock at one share for each dollar of stated value plus unpaid dividends.
The preferred stock has voting privileges equivalent to the shares of common
stock into which the preferred stock converts. The Company has authorized
1,000,000 shares of preferred stock.
9. Debt
Debt consists of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
---- ----
<S> <C> <C>
Revolving secured bank facility (9.5% at December 31, 1996) $4,953 $4,638
Safeguard note, subordinated to bank 887 887
Other 310 356
--------------- --------------
6,150 5,881
Less current debt 120 137
--------------- --------------
$6,030 $5,744
=============== ==============
</TABLE>
In March 1997, the Company terminated its credit facility with its
previous lender and successfully negotiated a new three year, $6 million credit
agreement maturing on March 14, 2000. Borrowings under the Company's previous
credit facility were repaid with proceeds from the new facility. This credit
facility is secured by guarantees of $4.5 million in the form of a letter of
credit from Safeguard through September 30, 2000 and substantially all of the
assets of the Company. Borrowings bear interest at prime plus 1% and the Company
pays a commitment fee of 1/2% on the unused portion of the credit facility. The
agreement limits borrowings under the credit facility to certain levels of
receivables and inventory and requires the maintenance of a minimum debt service
coverage ratio and limits the amounts available for capital expenditures. The
agreement prohibits the payment of cash dividends.
In 1995, Safeguard advanced $887,000 to the Company to cover costs of
the sale of the furnishings business and payments to Maris' sureties. The
Company has issued to Safeguard a Subordinate Note to evidence this obligation.
The Sudordinate Note accrues interest at 6% per annum. Interest and principal
are due December 31, 2000 and the Subordinate Note is subordinate to all the
Company's obligations to its other lenders. Additionally, if the Company's
performance will allow the canceling of the Safeguard letter of credit prior to
the maturity of the Subordinate Note, Safeguard has agreed to forgive all of
the note principal and accrued interest.
During 1996 and 1995, the Company borrowed a maximum of $5.6 and $9.9
million, respectively, under its credit facility. The weighted average interest
rate was 11.0% and 10.0% in 1996 and 1995, respectively.
7
<PAGE>
Interest paid, for continuing operations in 1996, 1995 and 1994 was
$569,700, $692,100 and $593,400, respectively.
10. Operating Leases
The Company leases its office facilities and certain equipment under
operating leases ranging from one to six years. Future minimum rental payments
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year are as follows:
(In thousands)
1997................................... $333
1998................................... 325
1999................................... 223
2000................................... 166
2001................................... 134
Thereafter............................. 3
-------
$1,184
=======
Rental expense in 1996, 1995 and 1994 was $351,600, $448,900 and $776,900,
respectively.
11. Major Customers
Prior to 1995, the Company's security systems segment was primarily in
the prison and airport construction business where the customer is an agent of
either the federal or state governments or local municipalities. During the year
ended December 31, 1994, one customer generated 15% of security systems sales.
In 1995, the Company turned over to its sureties most of its prison and
airport construction projects, and does not intend to bid for any significant
additional prison or airport projects.
In 1996 and 1995, the Company's security segment primarily provided low
voltage electronic security systems to the commercial and industrial markets
where the customers are either end users or general contractors. During the year
ended December 31, 1996, no one customer generated sales greater than 10% of net
sales and during 1995 two customers generated 12% and 10% of security sales.
The Company's air filtration products segment had two customers during
the year ended December 31, 1996 that generated 39% and 10% of sales and one
customer generated 18% and 19% of air filtration product sales in 1995 and 1994,
respectively.
8
<PAGE>
12. Income Taxes
The income expense (benefit) from continuing operations was:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current .............................................. $ 75 ($ 221) ($1,579)
Deferred ............................................. (84)
------- ------- ------
Continuing operations ................................ $ 75 ($ 221) ($1,663)
======= ======= ======
State tax provision included above.................... $ 75 $ 22
A reconciliation of the income tax provision (benefit)
from income taxes to the federal statutory rate
follows:
Statutory tax......................................... ($ 349) ($ 57) ($4,099)
benefit
State taxes net of federal tax........................ 75 15
benefit ..............................................
Non-deductible U.S.................................... 349 57 2,421
losses
Other ................................................ (221)
------- ------- ------
$ 75 ($ 221) ($1,663)
======= ======= ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets (liabilities) are presented below:
<TABLE>
<CAPTION>
(In thousands)
Deferred tax assets:
<S> <C> <C>
U.S. net operating loss carryforwards........................ $2,618 $2,477
Other expense allowance...................................... 156 179
Restructuring reserves....................................... 334 596
Receivables allowance........................................ 48 127
Inventory reserves........................................... 62 104
Alternative minimum tax credit............................... 97 97
--------------- ------------
Total gross deferred assets.............................. 3,315 3,580
Less valuation allowance................................. (3,315) (3,580)
--------------- ------------
Net deferred tax assets.................................. 0 0
--------------- ------------
</TABLE>
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized.
As of December 31, 1996, the Company had net operating loss
carryforwards for U.S. income tax purposes of approximately $7 million that may
be used until 2011 to offset taxable income.
Total income taxes paid (refunded) in 1996, 1995 and 1994, were
$0, ($1,602,700) and $158,200, respectively.
9
<PAGE>
13. Common Stock
Options may be granted to Company employees and directors under various
option plans. Generally, outstanding options vest over periods not exceeding
four years after the date of grant and expire seven years after date of grant.
To the extent allowable, all grants are incentive stock options. All options
granted under the plans to date have been at prices which have been equal to the
fair market value at the time of grant. At December 31, 1996, the Company
reserved approximately 1.4 million shares of common stock for possible future
issuance under its stock option plans.
Option activity under the Company's plan is summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------- ------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 930,500 $0.51 615,875 $0.91 759,250 $0.94
Options granted 569,500 0.28 705,000 0.38
Options canceled/expired (150,000) 0.70 (390,375) 0.91 (143,375) 1.10
------------ ------------ ------------
Outstanding at end of year 1,350,000 $0.38 930,500 $0.51 615,875 $0.91
============ ============ ------------
Options exercisable at year-end 338,875 236,833 387,325
Shares available for future grant 99,500 566,000 483,000
</TABLE>
The following summarizes information about the Company's stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ----------------------------
Weighted Avg.
Range of Number Remaining Number
Exercise Outstanding Contractual Life Weighted Avg. Exercisable Weighted Avg.
Prices at 12/31/96 (in years) Exercise Price at 12/31/96 Exercise Price
- ---------------------- -------------- -------------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$0.63 104,000 1.1 $0.63 104,000 $0.63
$0.84 - $0.94 94,000 3.3 $0.86 89,250 $0.86
$0.38 582,500 5.7 $0.38 145,625 $0.38
$0.25 - $0.45 569,500 6.8 $0.26
-------------- --------------
$0.25 - $0.94 1,350,000 5.6 $0.38 338,875 $0.58
============== ==============
</TABLE>
10
<PAGE>
The Company applies APB 25 and related interpretations in accounting
for stock option plans. Had compensation cost been recognized consistent with
SFAS 123, the Company's consolidated net income (loss) and earnings (loss) per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Consolidated net income (loss) As reported $ (451,800) $ 151,600
Pro forma $ (511,309) $ 134,083
Earnings (loss) per share - Primary As reported $ (0.05) $ 0.02
Pro forma $ (0.06) $ 0.01
Earnings (loss) per share - Fully diluted As reported $ (0.05) $ 0.01
Pro forma $ (0.06) $ 0.01
</TABLE>
The per share weighted-average fair value of stock options issued by
the Company during 1996 and 1995 was $0.26 and $0.38, respectively, on the date
of grant.
The following assumptions were used by the Company to determine the
fair value of stock options granted using the Black-Scholes option-pricing
model:
Assumptions
--------------------------
Dividend yield 0%
Expected volatility 150%
Average expected option life 7 years
Risk-free interest rate 6.0% to 6.9%
Pro forma consolidated net income (loss) reflects only options granted
in 1996 and 1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS 123 is not reflected in pro forma consolidated net
income (loss) amounts presented above because compensation cost is reflected
over an options' vesting period and compensation cost for options granted prior
to January 1, 1995 is not considered.
14. Retirement Plans
The Company has defined contribution plans which cover all employees.
Certain plans provide for a limited Company match of employee contributions. The
Company contributed $27,400, $2,100 and $132,700 in 1996, 1995 and 1994,
respectively.
11
<PAGE>
15. Liquidity and Capital Resources
The Company believes that the combination of Safeguard's letter of
credit and the working capital assets of the ongoing business will be sufficient
to support the borrowing under the credit facility. As of March 17, 1997,
outstanding borrowings under this facility were approximately $4.7 million. See
note 9 for terms of new credit facility.
Safeguard has made cash advances to the Company totaling $887,000 to
cover the closing costs of the sale of the furnishings segment and the cash
payments to the sureties. Safeguard is not contractually obligated to satisfy
any of the Company's obligations with the exception of the $4.5 million letter
of credit used as collateral under the Company's credit facility.
16. Segment Data
<TABLE>
<CAPTION>
Air
In thousands Security Filtration General
Systems Products Corp. Total
1996
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales....................................... $10,363 $7,354 $17,717
Earnings (loss) from continuing operations
before income taxes............................. (1,747) 920 (200) (1,027)
Assets employed................................ 4,522 2,225 $1,988 8,735
1995
-------------------------------------------------------------------------------------------------------
Net sales....................................... $12,987 $4,676 $17,663
Earnings (loss) from continuing operations
before income taxes............................. (474) 305 (169)
Assets employed................................. 4,385 1,907 $3,389 9,681
1994
-------------------------------------------------------------------------------------------------------
Net sales....................................... $27,178 $4,067 $31,245
Earnings (loss) from continuing operations
before income taxes............................. (11,895) (160) (12,055)
Assets employed................................. 5,009 2,213 $2,311 9,533
</TABLE>
The security systems segment provides low voltage electronic security and life
safety systems to the commercial, industrial and selected governmental markets.
Air filtration products segment designs and manufactures for clean room and air
filtration components and systems. Virtually all sales are to United States
customers, except for two foreign customers amounting to 6% and 5% of total net
sales in 1996 and 1995, respectively. During 1994 the Company discontinued the
furnishings segment.
12
<PAGE>
CORE TECHNOLOGIES (PENNSYLVANIA), INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance Additions
Beginning Charged to Balance
Description of Year Operations Deductions Other End of Year
- ----------- ----------------- ------------ ------------ ----------- ---------------
(1)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended December 31, 1996 $ 338,200 $ 57,600 $ (215,800) $ $ 180,000
Year ended December 31, 1995 2,864,700 52,600 (2,579,100) 338,200
Year ended December 31, 1994 1,842,900 1,170,800 (149,000) 2,864,700
</TABLE>
(1) Net write-offs.
Does not reflect the discontinued furnishings segment.
<PAGE>
EXHIBIT INDEX
The following is a list of exhibits required by Item 601 of Regulation
S-K to be filed as part of this Report. Where so indicated by footnote, exhibits
which were previously filed are incorporated by reference. For exhibits
incorporated by reference, the location of the exhibit in the previous filing is
indicated in parentheses. The page numbers listed refer to the page numbers
where such exhibits are located using the sequential numbering system specified
by Rules 0-3 and 403.
Sequentially
Numbered
Exhibit No. Exhibit Page
- ----------- ------- ------------
3.1 Amended and Restated Certificate of Incorporation
(12) (Exhibit 3.1)
3.2 By-Laws (1) (Exhibit 3.2)
4.1 Reference is made to Exhibit 3.1 (1) (Exhibit 4.1)
4.2 Form of certificate representing the shares of
Common Stock (1) (Exhibit 4.2)
4.3** Amended and Restated 1984 Stock Option Plan of
CenterCore, Inc.(3)(Exhibit 4.3)
4.4** Stock Option Plan for Non-Employee Directors
(2) (Exhibit 10.18)
4.5** 1993 Stock Option Plan (7)(Exhibit 4.1)
4.6 Certificate of Designation for Series A Preferred
Stock (7)(Exhibit 4.2)
10.1* Loan and Security Agreement dated March 14, 1997 by
and among Core Technologies (Pennsylvania), Inc.,
Maris Equipment Co., Inc. and Airo Clean, Inc.
(Borrowers) and FINOVA Capital Corporation (Lender)
10.2* $887,000 Subordinated Note from Core Technologies,
Inc. to Safeguard Scientifics (Delaware), Inc.
dated August 25, 1996
<PAGE>
Sequentially
Numbered
Exhibit No. Exhibit Page
- ----------- ------- ------------
10.3* Subordination Agreement dated March 14, 1997
between Safeguard Scientifics (Delaware), Inc. and
FINOVA Capital Corporation, and acknowledged by
Core Technologies (Pennsylvania), Inc.
10.4 Assignment and Assumption of Lease Agreement for
212 Phillips Road, Lionville, PA dated as of
February 1, 1993 between Airo Clean Engineering,
Inc. and Airo Clean Acquisition Corp.(3)(Exhibit
10.9)
10.5 Lease Agreement between CenterCore, Inc. and The
Nichols Company dated September 29, 1993 for 110
Summit Drive, Exton, PA and Landlord's Waiver dated
February 9, 1994 (6)(Exhibit 10.10)
10.6 Lease Agreement between Maris Equipment Company and
Chesco Nichols Company dated July 23, 1986 for 110C
Summit Drive, Exton, PA and amendments thereto
(6)(Exhibit 10.11)
10.7 Fourth Amendment to Lease* (11) Exhibit 10.8)
10.8** CenterCore, Inc. 401(k) Tax Deferred Retirement and
Incentive Plan (3)(Exhibit 10.16)
10.9** CenterCore, Inc. 401(k) Tax Deferred Retirement and
Incentive Plan, Amendment 2-93 (6)(Exhibit 10.13)
10.10** Third Amendment to the CenterCore, Inc. 401(k) Tax
Deferred Retirement and Incentive Plan effective as
of June 1, 1994 (7) (Exhibit 10.1)
10.11 Settlement Agreement between the Company and Joseph
Pisarra dated as of September 29, 1995* (11)
(Exhibit 10.19)
10.12 Asset Purchase Agreement dated February 1, 1993
between Airo Clean Acquisition Corp. and Airo Clean
Engineering, Inc. and Michael H. Pelosi III, Joseph
Pelosi and Michael H. Pelosi, Jr. (schedules and
exhibits omitted)(3)(Exhibit 10.27)
10.13** Employment Agreement dated February 1, 1993 between
Airo Clean, Inc. and Michael H. Pelosi, III (9)
(Exhibit 10.23)
-2-
<PAGE>
Sequentially
Numbered
Exhibit No. Exhibit Page
- ----------- ------- ------------
10.14 Exclusive License Agreement between Michael H.
Pelosi III and Airo Clean, Inc. dated as of
February 1, 1993 (3)(Exhibit 10.28)
10.15 Asset Purchase Agreement dated September 15, 1993
among MEC Acquisition, Inc., CenterCore, Inc.,
Maris Equipment Company and JWP Inc. (4)(Exhibit
2.1)
10.16 Promissory Note dated September 22, 1993 made by
Maris Equipment Company to JWP Inc. (4)(Exhibit 1)
10.17 Agreement and Release dated June 19, 1995 among
CenterCore, Inc., Maris Equipment Company, Inc.,
Safeguard Scientifics, Inc., EMCOR Group, Inc.,
JWP/MEC Corp., and Seaboard Surety Company
(9)(Exhibit 10.27)
10.18 Agreement dated June 16, 1995 among CenterCore,
Inc., Maris Equipment Company, Inc., and Insurance
Company of North America (9)(Exhibit 10.28)
10.19 Agreement dated June 19, 1995 among CenterCore,
Inc., Maris Equipment Company, Inc., and Liberty
Mutual Insurance Company (9)(Exhibit 10.29)
10.20 $1.1 Million Note to Safeguard Scientifics, Inc.
dated September 22, 1993 (5)(Exhibit 10.3)
10.21 Subordination Agreement dated March 1994 among
Maris Equipment Company, Inc., JWP/MEC Corp., and
Mellon Bank (8)(Exhibit 10.1)
10.22 Preferred Stock Purchase Agreement dated June 15,
1994 between CenterCore, Inc. and Safeguard
Scientifics (Delaware), Inc. (7) (Exhibit 10.3)
10.23 Asset Purchase Agreement dated May 26, 1995 among
CenterCore, Inc., Corel Corporate Seating, Inc. and
The CenterCore Group, Inc. (10) (Exhibit 2.1)
10.24 Amendment No. 1 dated as of June 30, 1995 to the
Asset Purchase Agreement (10)(Exhibit 2.2)
-3-
<PAGE>
Sequentially
Numbered
Exhibit No. Exhibit Page
- ----------- ------- ------------
10.25 Option Shares Escrow Agreement dated September 29,
1995, by and between George Mitchell, Frederick
Franks III, Philip Donnelly and the Company (11)
(Exhibit 10.46)
10.26 Promissory Note dated September 29, 1995 from
George Mitchell to the Company in the principal
amount of $83,333 (11) (Exhibit 10.47)
10.27 Promissory Note dated September 29, 1995 from
Frederick Franks III to the Company in the
principal amount of $83,333 (11) (Exhibit 10.48)
10.28 Promissory Note dated September 29, 1995 from
Philip Donnelly to the Company in the principal
amount of $83,333 (11) (Exhibit 10.49)
11 Computation of Per Share Earnings (Loss)*
21 List of Subsidiaries* (Exhibit 21)
23 Consent of Independent Auditors*
-4-
<PAGE>
- --------------
* Filed herewith
** These exhibits relate to compensatory plans, contracts
or arrangements in which directors and/or executive
officers of the registrant may participate.
(1) Filed on April 14, 1988 as an exhibit to Amendment No. 2
to the Registration Statement on Form S-1 (No. 33-18974)
and incorporated herein by reference.
(2) Filed on April 2, 1990 as an exhibit to Annual Report on
Form 10-K (No. 000-17577) and incorporated herein by
reference.
(3) Filed on March 31, 1993 as an exhibit to Annual Report
on Form 10-K (No. 000-17577) and incorporated herein by
reference.
(4) Filed on October 7, 1993 as an exhibit to Form 8-K (No.
000-17577) and incorporated herein by reference.
(5) Filed on November 15, 1993 as an exhibit to Quarterly
Report on Form 10-Q (No. 000-17577) and incorporated
herein by reference.
(6) Filed as an exhibit to Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 (No. 000-17577)
and incorporated herein by reference.
(7) Filed as an exhibit to Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1994 (No. 000-17577)
and incorporated herein by reference.
(8) Filed as an exhibit to Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 1994(No.
000-17577) and incorporated herein by reference.
(9) Filed as an exhibit to Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (No. 000-17577)
and incorporated herein by reference.
(10) Filed on August 25, 1995 as in Exhibit to Form 8-K (No.
000-17577) and incorporated herein by reference.
(13) Filed as an exhibit to Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 (No. 000-17577)
and incorporated herein by reference.
-5-
<PAGE>
EXHIBIT 10.1
FINOVA
Loan and Security Agreement
Borrowers: Core Technologies (Pennsylvania), Inc. ("Core"), Maris
Equipment Co., Inc. ("Maris") and Airo Clean, Inc.
("Airo")
Address: 110 Summit Drive
Exton, Pennsylvania 19341
Date: March 14, 1997
THIS LOAN AND SECURITY AGREEMENT ("Agreement") dated the date set forth above,
is entered into by and among the borrowers named above (individually, a
"Borrower" and collectively, the "Borrowers"), whose address is set forth above
and FINOVA Capital Corporation ("Lender"), whose address is 355 South Grand
Avenue, Suite 2400, Los Angeles, California 90071.
1. LOANS.
1.1 Total Facility. Upon the terms and conditions set forth herein and
provided that no Event of Default or event which, with the giving of notice or
the passage of time, or both, would constitute an Event of Default, shall have
occurred and be continuing, Lender shall, upon a Borrower's request, make
advances to such Borrower from time to time in an aggregate outstanding
principal amount not to exceed the Total Facility amount (the "Total Facility")
set forth on the schedule hereto (the "Schedule"), subject to deduction of
reserves for accrued interest and such other reserves as Lender deems proper
from time to time in good faith, and less amounts Lender may be obligated to pay
in the future on behalf of Borrowers. The Schedule is an integral part of this
Agreement and all references to "herein", "herewith" and words of similar import
shall for all purposes be deemed to include the Schedule.
1.2 Loans. Advances under the Total Facility ("Loans") shall be
comprised of the amounts shown on the Schedule.
1.3 Overlines. If at any time or for any reason the outstanding amount
of advances made pursuant hereto exceeds any of the dollar or percentage
limitations contained in the Schedule (any such excess, an "Overline"), then
Borrowers shall, jointly and severally, upon Lender's demand, immediately pay to
Lender, in cash, the full amount of such Overline. Without limiting Borrowers'
obligation to repay to Lender on demand the amount of any Overline, Borrowers
agree to pay Lender interest on the outstanding principal amount of any
Overline, on demand, at the rate set forth in on the Schedule. Borrowers
obligations under this section shall be joint and several.
1.4 Loan Account. All advances made hereunder shall be added to and
deemed part of the Obligations when made. Lender may from time to time charge
all Obligations of Borrowers to Borrowers' loan account with Lender.
<PAGE>
2. CONDITIONS PRECEDENT.
2.1 Initial Advance. The obligation of Lender to make the initial
advance hereunder is subject to the fulfillment, to the satisfaction of Lender
and its counsel, of each of the following conditions on or prior to the date set
forth on the Schedule: (a) Loan Documents. Lender shall have received (i) each
of the Loan Documents, executed by each of the parties thereto and, if
applicable, duly acknowledged for recording or filing in the appropriate
governmental offices; (ii) such Blocked Account or Dominion Account agreements
as it shall determine; and (iii) such other documents, instruments and
agreements in connection herewith as Lender shall require, executed, certified
and/or acknowledged by such parties as Lender shall designate; (b) Terminations
by Existing Lender. Borrowers' existing lender shall have executed and delivered
UCC termination statements and other documentation evidencing the termination of
its liens and security interests in the assets of each Loan Party; (c) Charter
Documents. Lender shall have received copies of each Loan Party's By-laws and
Articles or Certificate of Incorporation, as amended, modified, or supplemented
to the Closing Date, certified by the Secretary of such Loan Party; (d) Good
Standing. Lender shall have received a certificate of corporate status with
respect to each Loan Party, dated within ten (10) days of the Closing Date, by
the Secretary of State of the state of incorporation of such Loan Party, which
certificate shall indicate that such Loan Party is in good standing in such
state; (e) Foreign Qualification. Lender shall have received certificates of
corporate status with respect to each Loan Party, each dated within ten (10)
days of the Closing Date, issued by the Secretary of State of each state in
which its failure to be duly qualified or licensed would have a material adverse
effect on the financial condition or assets of such Loan Party, indicating that
such Loan Party is in good standing; (f) Authorizing Resolutions and Incumbency.
Lender shall have received a certificate from the Secretary of each Loan Party
attesting to (i) the adoption of resolutions of such Loan Party's Board of
Directors and Shareholders (if necessary) authorizing the borrowing of money
from Lender, or the guaranty of the obligations of Borrowers, as applicable, and
execution and delivery of the Loan Documents to which such Loan Party is a
party, and authorizing specific officers of such Loan Party to execute same, and
(ii) the authenticity of original specimen signatures of such officers; (g)
Insurance. Lender shall have received the insurance certificates and certified
copies of policies and Lender's loss payable endorsements required by Section
4.4 hereof, in form and substance satisfactory to Lender and its counsel; (h)
Searches; Certificates of Title. Lender shall have received searches in such
jurisdictions as it shall determine and confirmation of the filing of its
financing statements, and shall have received certificates of title with respect
to the Collateral which shall have been duly executed in a manner sufficient to
perfect all of the security interests granted to Lender; (i) Landlord and
Mortgagee Waivers. Lender shall have received landlord and mortgagee waivers
from the lessors and mortgagees of all locations where any Collateral is
located; (j) Fees. Borrowers, shall have paid all fees payable by them on the
Closing Date pursuant to this Agreement; (k) Opinion of Counsel. Lender shall
have received an opinion of Loan Parties' counsel covering such matters as
Lender shall determine in its sole discretion; (l) Officer Certificate. Lender
shall have received a certificate of the President and the Chief Financial
Officer or similar official of Core, attesting to the accuracy of each of the
representations and warranties of Borrowers set forth in the Agreement and the
fulfillment of all conditions precedent to the initial advance thereunder; (m)
Solvency Certificate. Lender shall have received a signed certificate of Core's
Chief Financial Officer concerning the solvency and financial condition of
Borrowers, on Lender's standard form; (n) Environmental Assessment. Borrowers
shall provide evidence satisfactory to Lender that the subject transaction is
environmentally acceptable; (o) Schedule Conditions. Borrowers shall have
complied with all additional conditions precedent as set forth in the Schedule
attached hereto; and (p) Other Matters. All other documents and legal matters in
connection with the transactions contemplated by this Agreement shall have been
delivered or executed or recorded and shall be in form and substance
satisfactory to Lender and its counsel.
2.2 Subsequent Advances. The obligation of Lender to make any advance
shall be subject to the further conditions precedent that, on and as of the date
of such advance: (a) The representations and warranties of Borrowers set forth
in this Agreement shall be accurate, before and after giving effect to such
advance and to the application of any proceeds thereof; (b) No Event of Default
and no event which, with notice or passage of time or both, would constitute an
Event of Default has occurred and is continuing, or would result from such
advance or from the application of any proceeds thereof; (c) no material adverse
change has occurred in any Borrower's business, operations, financial condition,
or assets or in the condition of the Collateral, or in the prospect of repayment
of the Obligations; and (d) Lender shall have received such other approvals,
opinions or documents as Lender shall reasonably request.
2.3 Guaranty. Each Borrower unconditionally and irrevocably guarantees
and promises to pay to Lender, or order, on demand, in lawful money of the
United States, as and when the same shall become due (by demand, acceleration or
otherwise), all present and future Obligations of the other Borrowers to Lender,
<PAGE>
whether heretofore, now or hereafter made, incurred or created, whether
voluntary or involuntary and howsoever arising, whether due or not due, absolute
or contingent, liquidated or unliquidated, secured or unsecured, and whether
such other Borrowers may be liable individually or jointly with others, and
whether recovery upon such Obligations may be or hereafter becomes barred by any
statute of limitations, or whether such Obligations may be or hereafter becomes
otherwise unenforceable.
The obligations of each Borrower under this Section 2.3 are independent
of and separate from the obligations of such Borrower and any other guarantor,
maker or endorser of the Obligations and shall not be reduced by, but shall
survive as if the same had not been made, any and all payments by such Borrower
under this Section 2.3 and/or any other guarantor, maker or endorser of the
Obligations and/or the application of any proceeds from any collateral security
for the Obligations until the Obligations is fully paid and finally discharged.
To the maximum extent permitted by law, each Borrower hereby waives any
claim, right or remedy such Borrower may now have or hereafter acquire against
the other Borrowers that arises under this Section 2.3 and/or from the
performance by any other guarantor including, without limitation, any claim,
remedy or right of subrogation, reimbursement, exoneration, contribution,
indemnification, or participation in any claim, right or remedy of Lender
against the other Borrowers or any security which Lender now has or hereafter
acquires, whether or not such claim, right or remedy arises in equity, under
contract, by statute, under common law or otherwise. In addition, each Borrower
hereby waives any right to proceed against the other Borrowers, now or
hereafter, for contribution, indemnity, reimbursement, and any other suretyship
rights and claims, whether direct or indirect, liquidated or contingent, whether
arising under express or implied contract or by operation of law, which such
Borrower may now have or hereafter have as against the other Borrowers with
respect to the Obligations. Each Borrower also hereby waives any rights to
recourse to or with respect to any asset of the other Borrowers. Each Borrower
agrees that in light of the immediately foregoing waivers, such Borrower shall
not be deemed a "creditor" of the other Borrowers, including without limitation,
for purposes of Sections 547 and 550 of the Bankruptcy Code.
Without affecting the liability of any Borrower under this Section 2.3,
from time to time, whether before or after any notice of termination hereof or
before or after any default in respect of the Obligations, Lender, may (without
notice or demand): (a) renew, extend, accelerate, or otherwise change the time
for payment of, or otherwise change any other term or condition of any document
or agreement evidencing or relating to any Obligations, including, without
limitation, to increase or decrease the rate of interest thereon; (b) accept,
substitute, waive, decrease, increase, release, exchange or otherwise alter any
collateral security, in whole or in part, securing the Obligations or any other
guaranty of the Obligations; (c) apply any and all such collateral security and
direct the order or manner of sale thereof as Lender, in its sole discretion,
may determine; (d) add, release or substitute any one or more other guarantors,
makers or endorsers of the Obligations, and otherwise deal with the other
Borrowers or any other guarantor, maker or endorser as Lender may elect; (e) in
Lender's sole discretion, settle, release on terms satisfactory to Lender, or by
operation of law or otherwise, compound, compromise, collect or otherwise
liquidate any Obligations and/or any collateral security therefor in any manner,
and bid and purchase any collateral security at any sale thereof; (f) apply any
and all payments or recoveries from the other Borrowers, from any other
guarantor, maker, endorser or from the undersigned to such of the Obligations as
Lender, in its sole discretion, may determine, whether such Obligations is
secured or unsecured or guaranteed or not guaranteed by others; (g) apply any
and all payments or recoveries from any other guarantor, maker or endorser of
the Obligations or sums realized from collateral security furnished by any of
them upon any of their indebtedness or obligations to Lender as Lender, in its
<PAGE>
sole discretion, may determine, whether or not such indebtedness or obligations
relate to the Obligations; and (h) refund at any time, at Lender's sole
discretion, any payment received by Lender in respect of any Obligations, and
payment to Lender of the amount so refunded shall be fully guaranteed under this
Section 2.3; all without in any way diminishing, releasing or discharging the
liability of such Borrower under this Section 2.3.
Upon default of a Borrower in respect of any Obligations, Lender may,
at its option and without notice to any other Borrower, proceed directly against
any other Borrower to collect and recover the full amount of the liability
hereunder, or any portion thereof, and each such other Borrower waives any right
to require Lender to: (a) proceed against the defaulting Borrower, or any other
guarantor, endorser, or other person whomsoever; (b) proceed against or exhaust
any collateral security given to or held by Lender in connection with the
Obligations; (c) give notice of the terms, time and place of any public or
private sale of any real or personal property security for the Obligations or
any other guaranty of the Obligations; or (d) pursue any other remedy in
Lender's power whatsoever. A separate action or actions may be brought and
prosecuted against a Borrower whether or not action is brought against the
defaulting Borrower and/or any other guarantor, maker or endorser of the
Obligations and whether the defaulting Borrower and/or any other guarantor,
maker or endorser be joined in any such action or actions; and each Borrower
waives the benefit of any statute of limitations affecting the liability under
this Section 2.3 or the enforcement this Section 2.3, and agrees that any
payment of any Obligations or other act which shall toll any statute of
limitations applicable thereto shall similarly operate to toll such statute of
limitations applicable to the liability under this Section 2.3.
Each Borrower waives any defense to the enforcement of its obligations
under this Section 2.3 arising by reason of any disability or other defense of
the other Borrowers or by reason of the cessation from any cause whatsoever of
the liability of the other Borrowers or by reason of any act or omission of
Lender or others which directly or indirectly results in or aids the discharge
or release of the other Borrowers or any Obligations or any security in respect
thereof by operation of law or otherwise. The obligations under this Section 2.3
shall be enforceable without regard to the validity, regularity or
enforceability of any of the Obligations or any of the Loan Documents, any other
guaranty of the Obligations or any collateral security documents securing any of
the Obligations or securing any other guaranty of the Obligations. No exercise
by Lender of, and no omission of Lender to exercise, any power or authority
recognized herein and no impairment or suspension of any right or remedy of
Lender against the other Borrowers, any other guarantor, maker or endorser or
any collateral security shall in any way suspend, discharge, release, exonerate
or otherwise affect any of each Borrower's obligations under this Section 2.3 or
any collateral security furnished by such Borrower or give to such Borrower any
right of recourse against Lender. Each Borrower specifically agrees that the
failure of Lender: (a) to perfect any lien on or security interest in any
property heretofore or hereafter given by the other Borrowers or any guarantor,
maker or endorser to secure payment of the Obligations or of any guaranty of the
Obligations, or to record or file any document relating thereto or (b) to file
or enforce a claim against the estate (either in administration, bankruptcy or
other proceeding) of the other Borrowers, any guarantor, maker or endorser,
shall not in any manner whatsoever terminate, diminish, exonerate or otherwise
affect the liability of such Borrower under this Section 2.3.
If any payments of money or transfers of property made to Lender by any
Borrower, any other guarantor, any maker or any endorser should for any reason
subsequently be declared to be, or in Lender's counsel's good faith opinion be
determined to be, fraudulent (within the meaning of any state or federal law
relating to fraudulent conveyances), preferential or otherwise voidable or
recoverable in whole or in part for any reason (herein after collectively called
"voidable transfers") under the Bankruptcy Code or any other federal or state
law and Lender is required to repay or restore, or in Lender's counsel's opinion
may be so liable to repay or restore, any such voidable transfer, or the amount
<PAGE>
or any portion thereof, then as to any such voidable transfer or the amount
repaid or restored and all costs and expenses (including attorneys' fees) of
Lender related thereto, such Borrower's liability under this Section 2.3 shall
automatically be revived, reinstated and restored and shall exist as though such
voidable transfer had never been made to Lender.
Each Borrower warrants and agrees that the waivers set forth in this
Section 2.3 are made with full knowledge of their significance and consequences,
and that under the circumstances, the waivers are reasonable and not contrary to
public policy or law. If any of said waivers are determined to be contrary to
any applicable law or public policy, such waivers shall be effective only to the
maximum extent permitted by law. Should any one or more provisions of this
Section 2.3 be determined to be illegal or unenforceable, all other provisions
hereof shall nevertheless remain effective.
Notwithstanding any provision of this Section 2.3 to the contrary, it
is intended that the obligations of each Borrower under this Section 2.3, not
constitute a "Fraudulent Conveyance" (as defined below). Consequently, each
Borrower agrees that if such Borrower's obligations under this Section 2.3, or
any liens or security interests securing such Borrower's obligations under this
Section 2.3, would, but for the application of this sentence, constitute a
Fraudulent Conveyance, such Borrower's obligations under this Section 2.3 and
each such lien and security interest shall be valid and enforceable only to the
maximum extent that would not cause such Borrower's obligations under this
Section 2.3 or such lien or security interest to constitute a Fraudulent
Conveyance, and such Borrower's obligations under this Section 2.3 shall
automatically be deemed to have been amended accordingly at all relevant times.
For purposes hereof, "Fraudulent Conveyance" means a fraudulent conveyance under
Section 548 of the Bankruptcy Code or a fraudulent conveyance or fraudulent
transfer under the provisions of any applicable fraudulent conveyance or
fraudulent transfer law or similar law of any applicable state, nation or other
governmental unit, as in effect from time to time.
3. INTEREST RATE AND OTHER CHARGES.
3.1 Interest; Fees. Borrowers shall pay Lender interest on the daily
outstanding balance of the Receivable Loans, Inventory Loans and undrawn face
amount of the L/C Loan at the per annum rate set forth on the Schedule.
Borrowers shall also pay Lender the fees set forth on the Schedule. Borrowers'
obligations under this Section shall be joint and several.
3.2 Default Interest Rate. Upon the occurrence of an Event of Default,
Borrowers shall pay Lender interest on the daily outstanding balance of
Borrowers' loan account at a rate per annum which is two percent (2%) in excess
of the rate which would otherwise be applicable thereto pursuant to the
Schedule. Borrowers' obligations under this Section shall be joint and several.
3.3 Examination Fees. Borrowers agree to pay to Lender an examination
fee in the amount set forth on the Schedule in connection with each audit or
examination of a Loan Party performed by Lender prior to or after the date
hereof. Without limiting the generality of the foregoing, Borrowers shall pay to
Lender an initial examination fee in an amount equal to the amount set forth on
the Schedule. Such initial examination fee shall be deemed fully earned at the
time of payment and due and payable upon the closing of this transaction, and
shall be deducted from any good faith deposit paid by Borrowers to Lender prior
to the date of this Agreement. Borrowers' obligations under this section shall
be joint and several.
3.4 Excess Interest. In no event whatsoever shall the interest rate and
other charges charged hereunder exceed the highest rate permissible under any
law which a court of competent jurisdiction shall, in a final determination,
deem applicable hereto. In the event that a court determines that Lender has
received interest and other charges hereunder in excess of the highest
permissible rate applicable thereto, Lender shall promptly apply such excess to
the Obligations in such order as Lender shall determine in its sole discretion
<PAGE>
or refund the amount thereof to Borrowers, and the provisions hereof shall be
deemed amended to provide for such permissible rate.
4. COLLATERAL.
4.1 Security Interest in the Collateral. To secure the payment and
performance of the Obligations when due, each Borrower hereby grants to Lender a
first priority security interest in all of such Borrower's now owned or
hereafter acquired or arising Inventory, Equipment, Receivables, the Centercore
Note, Trademarks, Licenses, and Patents, and General Intangibles, including,
without limitation, all of such Borrower's Deposit Accounts, money, any and all
property now or at any time hereafter in Lender's possession (including claims
and credit balances), and all proceeds (including proceeds of any insurance
policies, proceeds of proceeds and claims against third parties), all products
and all books and records related to any of the foregoing (all of the foregoing,
together with all other property in which Lender may be granted a lien or
security interest, is referred to herein, collectively, as the "Collateral").
4.2 Perfection and Protection of Security Interest. Each Borrower
shall, at its expense, take all actions requested by Lender at any time to
perfect, maintain, protect and enforce Lender's security interest and other
rights in the Collateral and the priority thereof from time to time, including,
without limitation, (i) executing and filing financing or continuation
statements and amendments thereof and executing and delivering such documents
and titles in connection with motor vehicles as Lender shall require, all in
form and substance satisfactory to Lender, (ii) maintaining a perpetual
inventory and complete and accurate stock records, (iii) delivering to Lender
warehouse receipts, if applicable, covering any portion of the Collateral
located in warehouses and for which warehouse receipts are issued, and, after
the occurrence of an Event of Default, transferring Inventory to warehouses
designated by Lender, (iv) placing notations on such Borrower's books of account
to disclose Lender's security interest therein, (v) at Lender's request,
delivering to Lender all letters of credit on which such Borrower is named
beneficiary and (vi) at Lender's request, delivering to Lender all instruments
evidencing amounts owing to such Borrower. Lender may file, without any
Borrower's signature, one or more financing statements disclosing Lender's
security interest under this Agreement. Each Borrower agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement. If any Collateral is
at any time in the possession or control of any warehouseman, bailee or any of a
Borrower's agents or processors, such Borrower shall notify such Person of
Lender's security interest in such Collateral and, upon Lender's request,
instruct them to hold all such Collateral for Lender's account subject to
Lender's instructions. From time to time, each Borrower shall, upon Lender's
request, execute and deliver confirmatory written instruments pledging the
Collateral to Lender, but such Borrower's failure to do so shall not affect or
limit Lender's security interest or other rights in and to the Collateral. Until
the Obligations have been fully satisfied and Lender's obligation to make
further advances hereunder has terminated, Lender's security interest in the
Collateral shall continue in full force and effect.
4.3 Preservation of Collateral. Lender may, in its sole discretion, at
any time discharge any lien or encumbrance on the Collateral or bond the same,
pay any insurance, maintain guards, pay any service bureau, obtain any record or
take any other action as is reasonably necessary to preserve the Collateral and
charge the cost thereof to Borrowers' loan account as an Obligation.
4.4 Insurance. Each Borrower will maintain and deliver evidence to
Lender of such insurance required, written by insurers and in amounts
satisfactory to Lender. All premiums shall be paid by each Borrower as and when
due. Accurate and complete copies of the policies shall be delivered by each
Borrower to Lender. If any Borrower fails to do so, Lender may (but shall not be
required to) procure such insurance at Borrowers' expense and charge the cost
thereof to Borrowers' loan account as an Obligation.
<PAGE>
5. EXAMINATION OF RECORDS; FINANCIAL REPORTING.
5.1 Examinations. Lender shall at all reasonable times have full access
to and the right to examine, audit, make abstracts and copies from and inspect
each Loan Party's records, files, books of account and all other documents,
instruments and agreements relating to the Collateral and the right to check,
test and appraise the Collateral. Each Borrower will deliver to Lender any
instrument necessary for Lender to obtain records from any service bureau
maintaining records for such Borrower. All instruments and certificates prepared
by any Borrower showing the value of any of the Collateral shall be accompanied,
upon Lender's request, by copies of related purchase orders and invoices. Lender
may, at any time after the occurrence of an Event of Default, remove from a
Borrower's premises such Borrower's books and records (or copies thereof) or
require such Borrower to deliver such books and records or copies to Lender.
Lender may, without expense to Lender, use such of a Borrower's personnel,
supplies and premises as may be reasonably necessary for maintaining or
enforcing Lender's security interest.
5.2 Reporting Requirements. Each Borrower shall furnish Lender, upon
request, such information and statements as Lender shall request from time to
time regarding such Borrower's business affairs, financial condition and the
results of its operations. Without limiting the generality of the foregoing,
each Borrower will provide Lender with (i) copies of sales invoices, customer
statements and credit memoranda issued, remittance advices and reports and
copies of deposit slips, upon request; (ii) copies of shipping and delivery
documents, upon request; (iii) on or prior to the dates set forth on the
Schedule, monthly agings (aged from invoice date) and reconciliations of
Receivables (with listings of concentrated accounts), payables reports,
perpetual inventory reports and unaudited financial statements with respect to
the prior month prepared on a basis consistent with such statements prepared in
prior months and otherwise in accordance with generally accepted accounting
principles, consistently applied; (iv) audited consolidated annual financial
statements, prepared in accordance with generally accepted accounting principles
applied on a basis consistent with the most recent Prepared Financials provided
to Lender by Borrowers, with (A) the unqualified report thereon of independent
certified public accountants acceptable to Lender and (B) a reconciliation of
the consolidating monthly, internally prepared, unaudited financial statements
to the audited consolidated annual financial statements, each as soon as
available, and in any event, within ninety (90) days after the end of each
fiscal year of Core; (v) if prepared, a management letter from the independent
certified public accountant which prepared the audited consolidated financial
statements, as soon as available, and in any event, within ninety (90) days
after the end of each fiscal year of Core; (vi) an annual operating budget
(including income statements, balance sheets and cash flow statements by month)
for the upcoming fiscal year of Core (on a month by month basis), at least
thirty (30) days prior to the end of each fiscal year of Core; and (vii) such
certificates relating to the foregoing as Lender may request, including, without
limitation, a monthly certificate in the form of Exhibit A hereto from the
president or the chief financial officer of Core showing Core's compliance with
the financial covenant set forth in this Agreement, and stating whether any
Event of Default has occurred or event which, with giving of notice or the
passage of time, or both, would constitute an Event of Default, and if so, the
steps being taken to prevent or cure such Event of Default.
6. COLLATERAL REPORTING; INVENTORY.
6.1 Invoices. No Borrower will re-date any invoice or sale from the
original date thereof or make sales on extended terms beyond those customary in
such Borrower's industry, or otherwise extend or modify the term of any
Receivable. If any Borrower becomes aware of any matter affecting any
Receivable, including information affecting the credit of the account debtor
thereon, such Borrower will promptly notify Lender in writing.
6.2 Instruments. In the event any Receivable is or becomes evidenced by
a promissory note, trade acceptance or any other instrument for the payment of
<PAGE>
money, each Borrower will immediately deliver such instrument to Lender
appropriately endorsed to Lender and, regardless of the form of any presentment,
demand, notice of dishonor, protest and notice of protest with respect thereto,
such Borrower will remain liable thereon until such instrument is paid in full.
6.3 Physical Inventory. Each Borrower shall conduct a physical count of
the Inventory at such intervals as Lender requests, and promptly supply Lender
with a copy of such accounts accompanied by a report of the value (calculated at
the lower of cost or market value on a first in, first out basis) of the
Inventory and such additional information with respect to the Inventory as
Lender may request from time to time.
6.4 Returns. For so long as no Event of Default has occurred and is
continuing and subject to the provisions of Section 9.2, if any account debtor
returns any Inventory to any Borrower in the ordinary course of its business,
such Borrower shall promptly determine the reason for such return and promptly
issue a credit memorandum to the account debtor (sending a copy to Lender if
such credit memorandum exceeds Twenty Thousand Dollars ($20,000)) in the
appropriate amount. In the event any attempted return occurs after the
occurrence of any Event of Default, each Borrower shall (i) hold the returned
Inventory in trust for Lender, (ii) segregate all returned Inventory from all of
its other property, (iii) conspicuously label the returned Inventory as Lender's
property and (iv) immediately notify Lender of the return of any Inventory,
specifying the reason for such return, the location and condition of the
returned Inventory, and on Lender's request deliver such returned Inventory to
Lender. No Borrower shall consign any Inventory.
7. PRINCIPAL PAYMENTS; PROCEEDS OF COLLATERAL.
7.1 Principal Payments. Except where evidenced by notes or other
instruments issued or made by any Borrower to Lender specifically containing
payment provisions which are in conflict with this Section 7.1 (in which event
the conflicting provisions of said notes or other instruments shall govern and
control), that portion of the Obligations consisting of principal payable on
account of Receivable Loans and Inventory Loans shall be payable by Borrowers to
Lender immediately upon the earliest of (i) the receipt by Lender or any
Borrower of any proceeds of any of the Collateral, to the extent of said
proceeds, (ii) the occurrence of an Event of Default in consequence of which
Lender elects to accelerate the maturity and payment of such loans, or (iii) any
termination of this Agreement pursuant to Section 16 hereof; provided, however,
that any Overline shall be payable on demand pursuant to the provisions of
Section 1.3 hereof. Borrowers' obligations under this section shall be joint and
several.
7.2 Collections. Until Lender notifies Borrowers to the contrary, each
Borrower may make collection of all Receivables of such Borrower for Lender and
shall receive all payments as trustee of Lender and immediately deliver all
payments to Lender in their original form as set forth below, duly endorsed in
blank. Lender or its designee may, at any time after the occurrence of an Event
of Default, notify account debtors that the Receivables of such Borrower have
been assigned to Lender and of Lender's security interest therein, and may
collect such Receivables directly and charge the collection costs and expenses
to Borrowers' loan account. Each Borrower agrees that, in computing the charges
under this Agreement, all items of payment shall be deemed applied by Lender on
account of the Obligations two (2) Business Days after receipt by Lender of good
funds which have been finally credited to Lender's account, whether such funds
are received directly from any Borrower or from the Blocked Account bank (if
any) or the Dominion Account bank (if any), pursuant to Section 7.3; provided,
however, that for purposes of calculating Borrowers' borrowing availability
<PAGE>
pursuant to Section 1.2 of the Schedule, all items of payment shall be deemed
applied by Lender on account of the Obligations upon receipt by Lender of good
funds which have been finally credited to Lender's account, whether such funds
are received directly from any Borrower or from the Blocked Account bank (if
any) or the Dominion Account bank (if any), pursuant to Section 7.3. Lender is
not, however, required to credit Borrowers' account for the amount of any item
of payment which is unsatisfactory to Lender in its sole discretion and Lender
may charge Borrowers' loan account for the amount of any item of payment which
is returned to Lender unpaid.
7.3 Establishment of a Lockbox Account or Dominion Account. At the
request of Lender, all proceeds of Collateral shall be deposited by Borrowers
into a lockbox account, or such other "blocked account" as Lender may require
(each, a "Blocked Account") pursuant to an arrangement with such bank as may be
selected by Borrowers and be acceptable to Lender. Each Borrower shall issue to
any such bank an irrevocable letter of instruction directing said bank to
transfer such funds so deposited to Lender, either to any account maintained by
Lender at said bank or by wire transfer to appropriate account(s) of Lender. All
funds deposited in a Blocked Account shall immediately become the sole property
of Lender and Borrowers shall obtain the agreement by such bank to waive any
offset rights against the funds so deposited. Lender assumes no responsibility
for any Blocked Account arrangement, including without limitation, any claim of
accord and satisfaction or release with respect to deposits accepted by any bank
thereunder. Alternatively, Lender may establish depository accounts in the name
of Lender at a bank or banks for the deposit of such funds (each, a "Dominion
Account") and Borrowers shall deposit all proceeds of Receivables and all cash
proceeds of any sale of Inventory or, to the extent permitted herein, Equipment
or cause same to be deposited, in kind, in such Dominion Accounts of Lender in
lieu of depositing same to Blocked Accounts.
7.4 Payments Without Deductions. Borrowers shall pay principal,
interest, and all other amounts payable hereunder, or under any related
agreement, without any deduction whatsoever, including, but not limited to, any
deduction for any setoff or counterclaim.
7.5 Collection Days Upon Repayment. In the event Borrowers repay the
Obligations in full at any time hereafter, such payment in full will be credited
(conditioned upon final collection) to Borrowers' loan account two (2) Business
Days after Lender's receipt thereof.
7.6 Monthly Accountings. Lender will provide Borrowers monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrowers and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Lender), unless any
Borrower notifies Lender in writing to the contrary within thirty (30) days
after each account is rendered, describing the nature of any alleged errors or
omissions.
<PAGE>
8. POWER OF ATTORNEY.
Each Borrower appoints Lender and its designees as such Borrower's
attorney, with the power to endorse such Borrower's name on any checks, notes,
acceptances, money orders or other forms of payment or security that come into
Lender's possession; to sign such Borrower's name on any invoice or bill of
lading relating to any Receivable, on drafts against customers, on assignments
of Receivables, on notices of assignment, financing statements and other public
records, on verifications of accounts and on notices to customers or account
debtors; to send requests for verification of Receivables to customers or
account debtors; after the occurrence of any Event of Default, to notify the
post office authorities to change the address for delivery of such Borrower's
mail to an address designated by Lender and to open and dispose of all mail
addressed to such Borrower; and to do all other things Lender deems necessary or
desirable to carry out the terms of this Agreement. Such Borrower hereby
ratifies and approves all acts of such attorney. Neither Lender nor any of its
designees will be liable for any acts or omissions nor for any error of judgment
or mistake of fact or law acting as such Borrower's attorney. This power, being
coupled with an interest, is irrevocable until the Obligations have been fully
satisfied and Lender's obligation to provide loans hereunder shall have
terminated.
9. RECEIVABLES.
9.1 Eligibility. Each Borrower represents and warrants that each
Receivable covers and will cover a bona fide sale or lease and delivery by it of
goods or the rendition by it of services in the ordinary course of its business,
and will be for a liquidated amount and Lender's security interest will not,
unless promptly disclosed to Lender in writing for amounts greater than Twenty
Thousand Dollars ($20,000), be subject to any offset, deduction, counterclaim,
rights of return or cancellation, lien or other condition. If any representation
and warranty herein is breached as to any Receivable or any Receivable ceases to
be an Eligible Receivable for any reason other than payment thereof, then Lender
may, in addition to its other rights hereunder, designate any and all
Receivables owing by that account debtor as not Eligible Receivables; provided,
that Lender shall in any such event retain its security interest in all
Receivables, whether or not Eligible Receivables, until the Obligations have
been fully satisfied and Lender's obligation to provide loans hereunder has
terminated.
9.2 Disputes. Each Borrower shall notify Lender promptly of all
disputes and claims and settle or adjust such disputes or claims at no expense
to Lender, but no discount, credit or allowance shall be granted to any account
debtor and no returns of merchandise shall be accepted by such Borrower without
Lender's consent, except for discounts, credits and allowances made or given in
the ordinary course of such Borrower's business. Lender may, at any time after
the occurrence of an Event of Default, settle or adjust disputes and claims
directly with account debtors for amounts and upon terms which Lender considers
advisable in its reasonable credit judgment and, in all cases, Lender will
credit Borrowers' loan account with only the net amounts received by Lender in
payment of any Receivables.
<PAGE>
10. EQUIPMENT.
Each Borrower shall keep and maintain the Equipment in good operating
condition and repair and make all necessary replacements thereto to maintain and
preserve the value and operating efficiency thereof at all times consistent with
such Borrower's past practice, ordinary wear and tear excepted. No Borrower
shall permit any item of Equipment to become a fixture (other than a trade
fixture) to real estate or an accession to other property.
11. OTHER LIENS; NO DISPOSITION OF COLLATERAL.
Each Borrower represents, warrants and covenants that (a) all
Collateral is and will continue to be owned by it free and clear of all liens,
claims and encumbrances whatsoever (except for Lender's security interest,
Permitted Encumbrances, and such other liens, claims and encumbrances as may be
permitted by Lender in its sole discretion from time to time in writing), and
(b) such Borrower will not, without Lender's prior written approval, sell,
encumber or dispose of or permit the sale, encumbrance or disposal of any
Collateral or any interest of a Borrower therein, except for the sale of
Inventory in the ordinary course of a Borrower's business. The proceeds of any
such sales shall be remitted to Lender pursuant to this Agreement for
application to the Obligations.
12. GENERAL REPRESENTATIONS AND WARRANTIES.
Each Borrower represents and warrants that:
12.1 Due Organization. Each Borrower is a corporation duly organized,
validly existing and in good standing under the laws of the State set forth on
the Schedule, is qualified and authorized to do business and is in good standing
in all states in which such qualification and good standing are necessary in
order for it to conduct its business and own its property, and has all requisite
power and authority to conduct its business as presently conducted, to own its
property and to execute and deliver each of the Loan Documents to which it is a
party and perform all of its Obligations thereunder, and has not taken any steps
to wind-up, dissolve or otherwise liquidate its assets;
12.2 Other Names. No Borrower has, during the preceding five (5) years,
been known by or used any other corporate or fictitious name except as set forth
on the Schedule, nor has any Borrower been the surviving corporation of a merger
or consolidation or acquired all or substantially all of the assets of any
person during such time except as set forth on the Schedule;
12.3 Due Authorization. The execution, delivery and performance by each
Borrower of the Loan Documents to which it is a party have been authorized by
all necessary corporate action and do not and will not constitute a violation of
any applicable law or of such Borrower's Articles or Certificate of
Incorporation or By-Laws or any other document, agreement or instrument to which
such Borrower is a party or by which such Borrower or its assets are bound;
12.4 Binding Obligation. Each of the Loan Documents to which each
Borrower is a party is the legal, valid and binding obligation of such Borrower
enforceable against it in accordance with its terms;
12.5 Intangible Property. Each Borrower possesses adequate assets,
licenses, patents, patent applications, copyrights, trademarks, trademark
applications and trade names for the present and planned future conduct of its
<PAGE>
business without any known conflict with the rights of others, and each is valid
and has been duly registered or filed with the appropriate governmental
authorities;
12.6 Capital. Each Borrower has capital sufficient to conduct its
business, is able to pay its debts as they mature, and owns property having a
fair salable value greater than the amount required to pay all of its debts
(including contingent debts);
12.7 Material Litigation. No Borrower has any pending or overtly
threatened litigation, actions or proceedings which would materially and
adversely affect its business, assets, operations, prospects or condition,
financial or otherwise, or the Collateral or any of Lender's interests therein;
12.8 Title; Security Interests of Lender. Each Borrower has good,
indefeasible and merchantable title to its respective property (including the
Collateral) and, upon the filing of UCC-1 Financing Statements and the recording
of any mortgages or deeds of trust with respect to real property, in each case
in the appropriate offices, this Agreement and such documents will create valid
and perfected first priority liens in such property and the Collateral, subject
only to Permitted Encumbrances;
12.9 Restrictive Agreements; Labor Contracts. No Borrower is a party or
subject to any contract or subject to any charge, corporate restriction,
judgment, decree or order materially and adversely affecting its business,
assets, operations, prospects or condition, financial or otherwise, or which
restricts its right or ability to incur Indebtedness, and no Borrower is a party
to any labor dispute. In addition, no labor contract is scheduled to expire
during the Initial Term of this Agreement, except as disclosed to Lender in
writing prior to the date hereof;
12.10 Laws. No Borrower is in violation of any applicable statute,
regulation, ordinance or any order of any court, tribunal or governmental
agency, in any respect materially and adversely affecting the Collateral or its
business, assets, operations, prospects or condition, financial or otherwise;
12.11 Consents. Each Borrower has obtained or caused to be obtained or
issued any required consent of a governmental agency or other Person in
connection with the financing contemplated hereby;
12.12 Defaults. No Borrower is in default with respect to any note,
indenture, loan agreement, mortgage, lease, deed or other agreement to which it
is a party or by which it or its assets are bound, nor has any event occurred
which, with the giving of notice or the lapse of time, or both, would cause such
a default;
12.13 Financial Condition. The Prepared Financials fairly present
Borrowers' financial condition and results of operations and those of such other
Persons described therein as of the date thereof; there are no material
omissions from the Prepared Financials or other facts or circumstances not
reflected in the Prepared Financials; and there has been no material and adverse
change in such financial conditions or operations since the date of the initial
Prepared Financials delivered to Lender hereunder;
12.14 ERISA. None of any Borrower, any ERISA Affiliate, or any Plan is
or has been in violation of any of the provisions of ERISA, any of the
qualification requirements of IRC Section 401(a) or any of the published
interpretations thereunder, nor have any Borrower or any ERISA Affiliate
received any notice to such effect. No notice of intent to terminate a Plan has
been filed under Section 4041 of ERISA, nor has any Plan been terminated under
ERISA. The PBGC has not instituted proceedings to terminate, or appoint a
trustee to administer, a Plan. No lien upon the assets of any Borrower has
arisen with respect to a Plan. No prohibited transaction or Reportable Event has
occurred with respect to a Plan. Neither any Borrower nor any ERISA Affiliate
has incurred any withdrawal liability with respect to any Multiemployer Plan.
Each Borrower and each ERISA Affiliate have made all contributions required to
be made by them to any Plan or Multiemployer Plan when due. There is no
accumulated funding deficiency in any Plan, whether or not waived;
12.15 Taxes. Each Borrower has filed all tax returns and such other
<PAGE>
reports as it is required by law to file and has paid or made adequate provision
for the payment on or prior to the date when due of all taxes, assessments and
similar charges that are due and payable;
12.16 Locations. Each Borrower's chief executive office and the offices
and locations where it keeps its respective property (including the Collateral)
(except for Inventory in transit) are at the locations set forth on the
Schedule, except to the extent that such locations may have been changed after
notice to Lender in accordance with Section 13.5 below;
12.17 Business Relationships. There exists no actual or threatened
termination, cancellation or limitation of, or any modification or change in,
the business relationship between a Borrower and any customer or any group of
customers whose purchases individually or in the aggregate are material to the
business of such Borrower, or with any material supplier, and there exists no
present condition or state of facts or circumstances which would materially and
adversely affect such Borrower or prevent such Borrower from conducting such
business after the consummation of the transactions contemplated by this
Agreement in substantially the same manner in which it has heretofore been
conducted;
12.18 Centercore Note. The outstanding principal balance of the
Centercore Note as of the date hereof is One Million Eight Hundred Twenty-Two
Thousand One Hundred Thirty-Six Dollars ($1,822,136). There are no defaults
under the Centercore Note and Centercore Group, Inc. has not asserted any
defense to the payment of the Centercore Note.
12.19 Reaffirmations. Each request for a loan made by a Borrower
pursuant to this Agreement shall constitute (i) an automatic representation and
warranty by such Borrower to Lender that there does not then exist any Event of
Default and (ii) a reaffirmation as of the date of said request of all of the
representations and warranties of such Borrower contained in this Agreement and
the other Loan Documents.
13. AFFIRMATIVE COVENANTS.
Each Borrower covenants that, so long as any Obligation remains
outstanding and this Agreement is in effect, it shall:
13.1 Expenses. Reimburse Lender for all costs, fees and expenses
incurred by Lender in connection with the negotiation, preparation, execution,
delivery, administration and enforcement of each of the Loan Documents,
including, but not limited to, the attorneys' and paralegals' fees of in-house
and outside counsel, lien, title search and insurance fees, appraisal fees, all
charges and expenses incurred in connection with any and all environmental
reports and environmental remediation activities, and all other costs, expenses,
taxes and filing or recording fees payable in connection with the transactions
contemplated by this Agreement including without limitation all such costs, fees
and expenses as Lender shall incur or for which Lender shall become obligated in
connection with (i) any inspection or verification of the Collateral, (ii) any
proceeding relating to the Loan Documents or the Collateral, (iii) actions taken
with respect to the Collateral and Lender's security interest therein,
including, without limitation, the defense or prosecution of any action
involving Lender and any Borrower or any third party, (iv) enforcement of any of
Lender's rights and remedies with respect to the Obligations or Collateral and
(v) consultation with Lender's attorneys and participation in any workout,
bankruptcy or other insolvency or other proceeding involving any Loan Party or
any Affiliate, whether or not suit is filed. Borrowers, shall also pay all
Lender charges in connection with bank wire transfers, forwarding of loan
proceeds, deposits of checks and other items of payment, returned checks,
establishment and maintenance of lock boxes and other blocked accounts, and all
other bank and administrative matters, in accordance with Lender's schedule of
bank and administrative fees and charges in effect from time to time. Borrowers'
obligations under this Section shall be joint and several.
13.2 Taxes. File all tax returns and pay or make adequate provision for
the payment of all taxes, assessments and other charges on or prior to the date
when due.
<PAGE>
13.3 Notice of Litigation. Promptly notify Lender in writing of any
litigation, suit or administrative proceeding which may materially and adversely
affect the Collateral or a Borrower's business, assets, operations, prospects or
condition, financial or otherwise, whether or not the claim is covered by
insurance.
13.4 ERISA. Notify Lender in writing (i) promptly upon the occurrence
of any event described in Paragraph 4043 of ERISA, other than a termination,
partial termination or merger of a Plan or a transfer of a Plan's assets and
(ii) prior to any termination, partial termination or merger of a Plan or a
transfer of a Plan's assets.
13.5 Change in Location. Notify Lender in writing forty-five (45) days
prior to any change in the location of a Borrower's chief executive office or
the location of any property of a Borrower, or a Borrower's opening or closing
of any other place of business.
13.6 Corporate Existence. Maintain its corporate existence and its
qualification to do business and good standing in all states necessary for the
conduct of its business and the ownership of its property and maintain adequate
assets, licenses, patents, copyrights, trademarks and trade names for the
conduct of its business.
13.7 Labor Disputes. Promptly notify Lender in writing of any labor
dispute to which a Borrower is or may become subject and the expiration of any
labor contract to which a Borrower is a party or bound.
13.8 Violations of Law. Promptly notify Lender in writing of any
violation of any law, statute, regulation or ordinance of any governmental
entity, or of any agency thereof, applicable to a Borrower which may materially
and adversely affect the Collateral or a Borrower's business, assets, prospects,
operations or condition, financial or otherwise.
13.9 Defaults. Notify Lender in writing within five (5) Business Days
of a Borrower's default under any note, indenture, loan agreement, mortgage,
lease or other agreement to which a Borrower is a party or bound, or of any
other default under any Indebtedness of a Borrower.
13.10 Capital Expenditures. Promptly notify Lender in writing of the
making of any Capital Expenditure (i) which would result in the breach of the
Capital Expenditure covenant set forth in Section 13.14 or (ii) in excess of
Fifty Thousand Dollars ($50,000).
13.11 Books and Records. Keep adequate records and books of account
with respect to its business activities in which proper entries are made in
accordance with generally accepted accounting principles consistently applied,
reflecting all its financial transactions.
13.12 Leases; Warehouse Agreements. Provide Lender with (i) copies of
all agreements between a Borrower and any landlord or warehouseman which owns
any premises at which any Collateral may, from time to time, be located, and
(ii) in addition to all landlord and mortgagee waivers provided pursuant to
Section 2.1(i) above, additional landlord and mortgagee waivers in form
acceptable to Lender with respect to all locations where any Collateral is
hereafter located.
13.13 Additional Documents. At Lender's request, promptly execute or
cause to be executed and delivered to Lender any and all documents, instruments
and agreements deemed necessary by Lender to facilitate the collection of any
property of a Borrower pledged to Lender (including the Collateral) or otherwise
to give effect to or carry out the terms or intent of this Agreement or any of
the other Loan Documents. Without limiting the generality of the foregoing, if
any of the Receivables with a face value in excess of One Thousand Dollars
($1,000) arises out of a contract with the United States of America or any
department, agency, subdivision or instrumentality thereof, each Borrower shall
promptly notify Lender of such fact in writing and shall execute any instruments
and take any other action required or requested by Lender to comply with the
provisions of the Federal Assignment of Claims Act.
13.14 Financial Covenants. Comply with the financial covenant set forth
on the Schedule.
<PAGE>
14. NEGATIVE COVENANTS.
Without Lender's prior written consent, which consent Lender may
withhold in its sole discretion, so long as any Obligation remains outstanding
and this Agreement is in effect, no Borrower shall: (a) Mergers. Merge or
consolidate with or acquire any other Person, or make any other material change
in its capital structure or in its business or operations which might adversely
affect the repayment of the Obligations; (b) Loans. Make advances, loans or
extensions of credit to, or invest in, any Person (except for travel-related
advances to employees of any Borrower not to exceed Ten Thousand Dollars
($10,000) in the aggregate at any time outstanding; (c) Dividends. Declare or
pay cash dividends upon any of its stock or distribute any of its property or
redeem, retire, purchase or acquire directly or indirectly any of its stock; (d)
Adverse Transactions. Enter into any transaction which materially and adversely
affects the Collateral or Borrowers' ability to repay the Obligations in full as
and when due; (e) Indebtedness of Others. Become directly or contingently liable
for the Indebtedness of any Person, except by endorsement of instruments for
deposit; (f) Repurchase. Make a sale to any customer on a bill-and-hold,
guaranteed sale, sale and return, sale on approval, consignment, or any other
repurchase or return basis; (g) Name. Use any corporate or fictitious name other
than its corporate name as set forth in its Articles or Certificate of
Incorporation on the date hereof; (h) Prepayment. Prepay any Indebtedness other
than trade payables and other than the Obligations; (i) Capital Expenditure.
Make or incur any Capital Expenditure if, after giving effect thereto, the
aggregate amount of all Capital Expenditures by Borrowers in any fiscal year
would exceed the amount set forth on the Schedule; (j) Indebtedness. Create,
incur, assume or permit to exist any Indebtedness (including Indebtedness in
connection with Capital Leases) except as set forth on the Schedule; (k)
Affiliate Transactions. Except as set forth below, sell, transfer, distribute or
pay any money or property to any Affiliate, or invest in (by capital
contribution or otherwise) or purchase or repurchase any stock or Indebtedness,
or any property, of any Affiliate, or become liable on any guaranty of the
indebtedness, dividends or other obligations of any Affiliate. Notwithstanding
the foregoing, Borrowers may pay compensation to employees who are Affiliates
and, if no Event of Default has occurred, Borrowers may engage in transactions
with Affiliates in the normal course of business, in amounts and upon terms
which are fully disclosed to Lender and which are no less favorable to Borrowers
than would be obtainable in a comparable arm's length transaction with a Person
who is not an Affiliate; (l) Nature of Business. Enter into any new business or
make any material change in any of a Borrower's business objectives, purposes
and operations; (m) Lender's Name. Use the name of Lender in connection with any
of a Borrower's business or activities, except in connection with internal
business matters or as required in dealings with governmental agencies and
financial institutions or with trade creditors of a Borrower, solely for credit
reference purposes; or (n) Margin Security. Own, purchase or acquire (or enter
into any contract to purchase or acquire) any "margin security" as defined by
any regulation of the Federal Reserve Board as now in effect or as the same may
hereafter be in effect.
<PAGE>
15. ENVIRONMENTAL MATTERS.
15.1 Definitions. The following definitions apply to the provisions of
this Section 15: (i) The term "Applicable Law" shall include, but shall not be
limited to, each statute named or referred to in this Section 15.1 and all rules
and regulations thereunder, and any other local, state and/or federal laws,
rules, regulations and ordinances, whether currently in existence or hereafter
enacted, which govern, to the extent applicable to the Property or to a
Borrower, (a) the existence, cleanup and/or remedy of contamination on real
property; (b) the protection of the environment from soil, air or water
pollution, or from spilled, deposited or otherwise emplaced contamination; (c)
the emission or discharge of hazardous substances into the environment; (d) the
control of hazardous wastes; or (e) the use, generation, transport, treatment,
removal or recovery of Hazardous Substances. (ii) The term "Hazardous Substance"
shall mean (a) any oil, flammable substance, explosives, radioactive materials,
hazardous wastes or substances, toxic wastes or substances or any other wastes,
materials or pollutants which (i) pose a hazard to the Property or to persons on
or about the Property or (ii) cause the Property to be in violation of any
Applicable Law; (b) asbestos in any form which is or could become friable, urea
formaldehyde foam insulation, transformers or other equipment which contain
dielectric fluid containing levels of polychlorinated biphenyls, or radon gas;
(c) any chemical, material or substance defined as or included in the definition
of "hazardous substances," "waste," "hazardous wastes," "hazardous materials,"
"extremely hazardous waste," "restricted hazardous waste," or "toxic substances"
or words of similar import under any Applicable Law, including, but not limited
to, the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), 42 USC Sections 9601 et seq.; the Resource Conservation and Recovery
Act ("RCRA"), 42 USC Sections 6901 et seq.; the Hazardous Materials
Transportation Act, 49 USC Sections 1801 et seq.; and the Federal Water
Pollution Control Act, 33 USC Sections 1251 et seq.; (d) any other chemical,
material or substance, exposure to which is prohibited, limited or regulated by
any governmental authority which may or could pose a hazard to the health and
safety of the occupants of the Property or the owners and/or occupants of
property adjacent to or surrounding the Property, or any other person coming
upon the Property or adjacent property; and (e) any other chemical, materials or
substance which may or could pose a hazard to the environment. (iii) The term
"Property" shall mean all real property, wherever located, in which a Borrower
or any Affiliate of a Borrower has any right, title or interest, whether now
existing or hereafter arising, and including, without limitation, as owner,
lessor or lessee.
<PAGE>
15.2 Covenants and Representations. Each Borrower represents and
warrants that there have not been during the period of a Borrower's possession
of any interest in the Property and, to the best of its knowledge after
reasonable inquiry, there have not been at any other times, any activities on
the Property involving, directly or indirectly, the use, generation, treatment,
storage or disposal of any Hazardous Substances except in compliance with
Applicable Law (a) under, on or in the land included in the Property, whether
contained in soil, tanks, sumps, ponds, lagoons, barrels, cans or other
containments, structures or equipment, (b) incorporated in the buildings,
structures or improvements included in the Property, including any building
material containing asbestos, or (c) used in connection with any operations on
or in the Property. Without limiting the generality of the foregoing and to the
extent not included within the scope of this Section 15.2, each Borrower
represents and warrants that each Borrower is in full compliance with Applicable
Law and has received no notice from any person or any governmental agency or
other entity of any violation by any Borrower or its Affiliates of any
Applicable Law. Borrowers shall be solely responsible for and agrees to
indemnify Lender, protect and defend with counsel reasonably acceptable to
Lender, and hold Lender harmless from and against any claims actions,
administrative proceedings, judgments, damages, punitive damages, penalties,
fines, costs, liabilities (including sums paid in settlements of claims),
interest or losses, attorneys' fees (including any fees and expenses incurred in
enforcing this indemnity), consultant fees, expert fees, and other out-of-pocket
costs or expenses actually incurred by Lender (collectively, the "Environmental
Costs"), that may, at any time or from time to time, arise directly or
indirectly from or in connection with: (a) the presence, suspected presence,
release or suspected release of any Hazardous Substance whether into the air,
soil, surface water or groundwater of or at the Property, or any other violation
of Applicable Law, or (b) any breach of the foregoing representations and
covenants; except to the extent any of the foregoing result from the actions of
Lender, its employees, agents and representatives. All Environmental Costs
incurred or advanced by Lender shall be deemed to be made by Lender in good
faith and shall constitute Obligations hereunder. Borrowers' obligations under
this section shall be joint and several.
16. TERM; TERMINATION.
16.1 Term. The initial term of this Agreement shall be as set forth on
the Schedule (the "Initial Term") and shall be automatically renewed for
successive periods of one (1) year (each, a "Renewal Term"), unless earlier
terminated as provided herein.
16.2 Prior Notice. Each party shall have the right to terminate this
Agreement at the end of the Initial Term or at the end of any Renewal Term by
giving the other parties written notice not less than sixty (60) days prior to
the effective date of such termination, by registered or certified mail.
16.3 Payment in Full. Upon the effective date of termination, the
Obligations shall become immediately due and payable in full in cash.
16.4 Early Termination; Termination Fee. In addition to the procedure
set forth in Section 16.2, Borrowers may terminate this Agreement at any time
upon sixty (60) days' prior written notice and prepay the Obligations. Upon any
such early termination by Borrowers or any termination of this Agreement by
Lender upon the occurrence of an Event of Default, then, and in any such event,
Borrowers shall pay to Lender upon the effective date of such termination a fee
(the "Termination Fee") in an amount equal to the amount shown on the Schedule.
Borrowers' obligations under this Section shall be joint and several.
<PAGE>
17. DEFAULT.
17.1 Events of Default. Any one or more of the following events shall
constitute an Event of Default under this Agreement:
(i) A Borrower fails to pay when due and payable any portion of the
Obligations at stated maturity, upon acceleration or otherwise;
(ii) A Borrower or any other Loan Party fails or neglects to perform,
keep, or observe any Obligation including, but not limited to, any term,
provision, condition, covenant or agreement contained in any Loan Document to
which such Loan Party is a party;
(iii) Any material adverse change occurs in a Borrower's business,
assets, operations, prospects or condition, financial or otherwise;
(iv) The prospect of repayment of any portion of the Obligations or the
value or priority of Lender's security interest in the Collateral is materially
impaired;
(v) Any material portion of a Borrower's assets is seized, attached,
subjected to a writ or distress warrant, is levied upon or comes into the
possession of any judicial officer;
(vi) A Borrower shall generally not pay its debts as they become due or
shall enter into any agreement (whether written or oral), or offer to enter into
any agreement, with all or a significant number of its creditors regarding any
moratorium or other indulgence with respect to its debts or the participation of
such creditors or their representatives in the supervision, management or
control of the business of such Borrower;
(vii) Any bankruptcy or other insolvency proceeding is commenced by a
Borrower, or any such proceeding is commenced against a Borrower and remains
undischarged or unstayed for forty-five (45) days;
(viii) Any notice of lien, levy or assessment is filed of record with
respect to any of a Borrower's assets;
(ix) Any judgments are entered against a Borrower in an aggregate
amount exceeding Fifty Thousand Dollars ($50,000);
(x) Any default shall occur under any material agreement between a
Borrower and any third party including, without limitation, any default which
would result in a right by such third party to accelerate the maturity of any
Indebtedness of such Borrower to such third party;
(xi) Any representation or warranty made or deemed to be made by a
Borrower, any Affiliate or any other Loan Party in any Loan Document or any
other statement, document or report made or delivered to Lender in connection
therewith shall prove to have been misleading in any material respect;
(xii) Any Prohibited Transaction or Reportable Event shall occur with
respect to a Plan which could have a material adverse effect on the financial
condition of a Borrower; any lien upon the assets of a Borrower in connection
with any Plan shall arise; a Borrower or any of its ERISA Affiliates shall fail
to make full payment when due of all amounts which such Borrower or any of its
ERISA Affiliates may be required to pay to any Plan or any Multiemployer Plan as
one or more contributions thereto; a Borrower or any of its ERISA Affiliates
creates or permits the creation of any accumulated funding deficiency, whether
or not waived;
(xiii) Any transfer of any of the issued and outstanding shares of
common stock or other evidence of ownership of Maris or Airo;
(xiv) Either (a) Safeguard Scientifics (Delaware), Inc. and Frederick
B. Franks, George E. Mitchell and Phillip Donnelly (collectively, the
"Management Team") at any time collectively own less than fifty-one percent
(51%) of the issued and outstanding shares of common stock or other evidence of
ownership of Core, or (b) the Management Team at any time does not possess the
requisite votes to elect, or has not elected, a majority of the directors which
comprise the board of directors of Core; or
(xv) A default under the Centercore Note.
17.2 Remedies. Upon the occurrence of an Event of Default, Lender may,
<PAGE>
at its option and in its sole discretion and in addition to all of its other
rights under the Loan Documents, terminate this Agreement and declare all of the
Obligations to be immediately payable in full. Lender shall also have all of its
rights and remedies under applicable law, including, without limitation, the
default rights and remedies of a secured party under the Code, and further,
Lender may, at any time, take possession of the Collateral and keep it on any
Borrower's premises, at no cost to Lender, or remove any part of it to such
other place(s) as Lender may desire or, upon Lender's demand, require a
Borrower, at such Borrower's sole cost, to assemble the Collateral and make it
available to Lender at a place reasonably convenient to Lender and Lender may
sell and deliver any Collateral at public or private sales, for cash, upon
credit or otherwise, at such prices and upon such terms as Lender deems
advisable, at Lender's discretion, and may, if Lender deems it reasonable,
postpone or adjourn any sale of the Collateral by an announcement at the time
and place of sale or of such postponed or adjourned sale without giving a new
notice of sale. Each Borrower agrees that Lender has no obligation to preserve
rights to the Collateral or marshall any Collateral for the benefit of any
Person. Lender is hereby granted a license or other right to use, without
charge, each Borrower's labels, patents, copyrights, name, trade secrets, trade
names, trademarks and advertising matter, or any similar property, in completing
production, advertising or selling any Collateral and each Borrower's rights
under all licenses and all franchise agreements shall inure to Lender's benefit.
Any requirement of reasonable notice shall be met if such notice is mailed
postage prepaid to the applicable Borrower at its address set forth in the
heading to this Agreement at least five (5) days before sale or other
disposition. The proceeds of sale shall be applied, first, to all attorneys fees
and other expenses of sale, and second, to the Obligations in such order as
Lender shall elect, in its sole discretion. Lender shall return any excess to
Borrowers, and Borrowers shall remain, jointly and severally, liable for any
deficiency to the fullest extent permitted by law. Without limiting any of
Lender's rights and remedies hereunder, upon the occurrence of an Event of
Default, Lender may draw upon the Letter of Credit and apply the proceeds
thereof to the Obligations in such order and manner as Lender shall elect.
17.3 Standards for Determining Commercial Reasonableness. Each Borrower
and Lender agree that the following conduct by Lender with respect to any
disposition of Collateral shall conclusively be deemed commercially reasonable
(but other conduct by Lender, including, but not limited to, Lender's use in its
sole discretion of other or different times, places and manners of noticing and
conducting any disposition of Collateral shall not be deemed unreasonable): Any
public or private disposition as to which on no later than the fifth calendar
day prior thereto written notice thereof is mailed or personally delivered to
the applicable Borrower and, with respect to any public disposition, on no later
than the fifth calendar day prior thereto notice thereof describing in general
non-specific terms, the Collateral to be disposed of is published once in a
newspaper of general circulation in the county where the sale is to be
conducted, at any place designated by Lender, with or without the Collateral
being present, and which commences at any time between 8:00 a.m. and 5:00 p.m.
(provided that no notice of any public or private disposition need be given to
the applicable Borrower if the Collateral is perishable or threatens to decline
speedily in value or is of a type customarily sold on a recognized market).
Without limiting the generality of the foregoing, each Borrower expressly agrees
that, with respect to any disposition of accounts, instruments and general
intangibles, it shall be commercially reasonable for Lender to direct any
prospective purchaser thereof to ascertain directly from such Borrower any and
all information concerning the same, including, but not limited to, the terms of
payment, aging and delinquency, if any, the financial condition of any obligor
or account debtor thereon or guarantor thereof, and any collateral therefor.
<PAGE>
18. DEFINITIONS.
18.1 Defined Terms. As used in this Agreement, the following terms have
the definitions set forth below:
"Affiliate" means any Person controlling, controlled by or under common control
with a Borrower. For purposes of this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause direction of
the management and policies of a Borrower, whether through ownership of common
or preferred stock or other equity interests, by contract or otherwise. Without
limiting the generality of the foregoing, each of the following shall be an
Affiliate: any officer, director, employee or other agent of a Borrower, any
shareholder of greater than ten percent (10%) of the issued and outstanding
shares of capital stock of a Borrower or subsidiary of a Borrower, and any other
Person with whom or which a Borrower has common shareholders, officers or
directors.
"Business Day" means any day on which commercial banks in both Los Angeles,
California and Phoenix, Arizona are open for business.
"Capital Expenditures" means all expenditures made and liabilities incurred for
the acquisition of any fixed asset or improvement, replacement, substitution or
addition thereto which has a useful life of more than one (1) year and
including, without limitation, those arising in connection with Capital Leases.
"Capital Lease" means any lease of property by a Borrower that, in accordance
with generally accepted accounting principles, should be capitalized for
financial reporting purposes and reflected as a liability on the balance sheet
of such Borrower.
"Centercore Note" means that certain Promissory Note dated as of October 20,
1995 issued by Centercore Group, Inc. to Core in the original principal amount
of One Million Nine Hundred Sixty-Two Thousand
Three Hundred Dollars ($1,962,300).
"Closing" means the initial advance made by Lender pursuant to this Agreement.
"Closing Date" means the date of the Closing.
"Code" means the Uniform Commercial Code as adopted, amended, and in effect in
the State of Arizona from time to time.
"Collateral" has the meaning set forth in Section 4.1 above.
"Collateral Assignment" means that certain Collateral Assignment of Trademarks,
Licenses and Patents and Security Agreement, of even date herewith, between
Airo and Lender.
"Deposit Accounts" has the meaning set forth in Section 47-9105 of the Code.
"Eligible Inventory" means Inventory which Lender, in its sole judgment, deems
Eligible Inventory, based on such considerations as Lender may from time to time
deem appropriate. Without limiting the generality of the foregoing, no Inventory
shall be Eligible Inventory unless, in Lender's sole judgment, such Inventory
(i) is owned by Airo, (ii) consists of raw materials in good, new and salable
condition which are not obsolete or unmerchantable, are not comprised of work in
process or packaging, materials or supplies, are not items returned under
warranty or subassemblies, are not slow-moving or held on consignment, and are
not proprietary in nature (i.e. Ultraguard covers); (ii) meets all standards
imposed by any governmental agency or authority; (iv) conforms in all respects
to the warranties and representations set forth herein; (v) is at all times
subject to Lender's duly perfected, first priority security interest; and (vi)
is situated at 110 Summit Drive, Exton, Pennsylvania 19341.
"Eligible Receivables" means Receivables which Lender, in its sole judgment,
shall deem eligible based on such considerations as Lender may from time to time
deem appropriate. Without limiting the foregoing, a Receivable shall not be
deemed to be an Eligible Receivable if (i) the account debtor has failed to pay
the Receivable within a period of ninety (90) days after invoice date, to the
extent of any amount remaining unpaid after such period; (ii) the account debtor
has failed to pay more than fifty percent (50%) of all outstanding Receivables
owed by it to any Borrower within ninety (90) days after invoice date excluding
retainage; (iii) the account debtor is an Affiliate of any Borrower; (iv) the
<PAGE>
goods relating thereto are placed on consignment, guaranteed sale, "bill and
hold" or other terms pursuant to which payment by the account debtor may be
conditional; (v) the account debtor is not located in the United States or
Canada, unless the Receivable is supported by a letter of credit or other form
of guaranty or security, in each case in form and substance satisfactory to
Lender; (vi) the account debtor is the United States or any department, agency
or instrumentality thereof; (vii) the account debtor is any State, city or
municipality of the United States and the amount thereof exceeds Fifty Thousand
Dollars ($50,000); (viii) a Borrower is or may become liable to the account
debtor; (ix) the account debtor's total obligations to Borrowers exceed fifteen
percent (15%) of all Eligible Receivables, to the extent of such excess
(percentages which exceed fifteen percent (15%) shall be subject to Lender's
approval); (x) the account debtor disputes liability or makes any claim with
respect thereto (up to the amount of such liability or claim), or is subject to
any insolvency or bankruptcy proceeding, or becomes insolvent, fails or goes out
of a material portion of its business; (xi) the amount thereof consists of late
charges or finance charges; (xii) the amount thereof consists of credit balances
more than ninety (90) days past invoice date, but only to the extent such
amounts consist of credit balances more than ninety (90) days past invoice date;
(xiii) the Receivable is evidenced by an instrument or chattel paper unless such
instrument or chattel paper is delivered to Lender; (xiv) the face amount
thereof exceeds One Hundred Thousand Dollars ($100,000), unless accompanied by
evidence of shipment of the goods relating thereto satisfactory to Lender in its
sole discretion; (xv) the Receivable represents a customer deposit; (xvii) the
Receivable is a billing for retainage withheld; (xviii) the Receivable
represents amounts billed for service or maintenance contracts; or (xix) the
Receivable pertains to a job which is bonded.
"Equipment" means all of each Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in such Borrower's operations or owned by such Borrower and any
interest in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions and improvements to any of the foregoing,
wherever located.
"ERISA" means the Employment Retirement Income Security Act of 1974, as amended,
and the regulations thereunder.
"ERISA Affiliate" means each trade or business (whether or not incorporated and
whether or not foreign) which is or may hereafter become a member of a group of
which a Borrower is a member and which is treated as a single employer under
ERISA Section 4001(b)(1), or IRC Section 414.
"Event of Default" means any of the events set forth in Section 17.1 of this
Agreement.
"General Intangibles" means all general intangibles of each Borrower, whether
now owned or hereafter created or acquired by such Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in all
litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of such Borrower against Lender, rights to purchase or
sell real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including without limitation credit, liability,
property and other insurance) tax refunds and claims, computer programs, discs,
tapes and tape files, claims under guaranties, security interests or other
security held by or granted to such Borrower to secure payment of any of the
Receivables by an account debtor, all rights to indemnification and all other
intangible property of every kind and nature (other than Receivables).
"Indebtedness" means all of each Borrower's present and future obligations,
<PAGE>
liabilities, debts, claims and indebtedness, contingent, fixed or otherwise,
however evidenced, created, incurred, acquired, owing or arising, whether under
written or oral agreement, operation of law or otherwise, and includes, without
limiting the foregoing (i) the Obligations, (ii) obligations and liabilities of
any Person secured by a lien, claim, encumbrance or security interest upon
property owned by such Borrower, even though such Borrower has not assumed or
become liable therefor, (iii) obligations and liabilities created or arising
under any lease (including Capital Leases) or conditional sales contract or
other title retention agreement with respect to property used or acquired by
such Borrower, even though the rights and remedies of the lessor, seller or
lender are limited to repossession, (iv) all unfunded pension fund obligations
and liabilities and (v) deferred taxes.
"Initial Term" has the meaning set forth on the Schedule.
"Inventory" means all of each Borrower's now owned and hereafter acquired goods,
merchandise and other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease, all raw materials, work in
process, finished goods and materials and supplies of any kind, nature or
description which are or might be used or consumed in such Borrower's business
or used in connection with the manufacture, packing, shipping, advertising,
selling or finishing of such goods, merchandise and other personal property, and
all documents of title or other documents representing them.
"Inventory Loans" has the meaning set forth on the Schedule.
"IRC" means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder.
"Letter of Credit" means that certain Letter of Credit issued by PNC Bank in the
amount of Four Million Five Hundred Thousand Dollars ($4,500,000) for the
account of Subordinating Creditor in favor of Lender.
"Loan Documents" means, collectively, this Agreement, the Collateral Assignment,
the Subordination Agreement, any note or notes executed by any Borrower and
payable to Lender, and any other agreement entered into in connection with this
Agreement, such security agreements, intellectual property assignments and
mortgages as Lender may require with respect to this Agreement or the Guaranty,
together with all alterations, amendments, changes, extensions, modifications,
refinancings, refundings, renewals, replacements, restatements, or supplements,
of or to any of the foregoing.
"Loan Party" means each Borrower and each other party (other than Lender) to any
Loan Document.
"Multiemployer Plan" means a "multiemployer plan" as defined in ERISA Sections
3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of a Borrower
or any ERISA Affiliate.
"Obligations" means all present and future loans, advances, debts, liabilities,
obligations, covenants, duties and indebtedness at any time owing by a Borrower
to Lender, whether evidenced by this Agreement any note or other instrument or
document, whether arising from an extension of credit, opening of a letter of
credit, banker's acceptance, loan, guaranty, indemnification or otherwise,
whether direct or indirect (including, without limitation, those acquired by
assignment and any participation by Lender in such Borrower's debts owing to
others), absolute or contingent, due or to become due, including, without
limitation, all interest, charges, expenses, fees, attorney's fees and any other
sums chargeable to such Borrower hereunder or under any other agreement with
Lender.
"Operating Cash Flow" means, for any period, Borrowers' consolidated net income
or loss (excluding the effect of any extraordinary gains or losses from sales of
property not in the ordinary course of business), determined in accordance with
generally accepted accounting principles, plus each of the following items
(determined on a consolidated basis) to the extent deducted from the revenues of
Borrowers in the calculation of net income or loss: (i) depreciation; (ii)
amortization; and (iii) interest expense, paid or accrued; less all actual
Capital Expenditures made during such period.
"Overlines" has the meaning set forth in Section 1.3.
<PAGE>
"PBGC" means the Pension Benefit Guarantee Corporation.
"Permitted Encumbrance" means each of the liens, mortgages and other security
interests set forth on the Schedule and incorporated herein by this reference.
"Person" means any individual, sole proprietorship, partnership, joint venture,
trust, unincorporated organization, association, corporation, government, or any
agency or political division thereof, or any other entity.
"Plan" means any plan described in ERISA Section 3(2) maintained for employees
of any Borrower or any ERISA Affiliate, other than a Multiemployer Plan.
"Prepared Financials" means the balance sheets of Borrowers as of the date set
forth in the Schedule, and as of each subsequent date on which audited balance
sheets are delivered to Lender from time to time hereunder, and the related
statements of operations, changes in stockholder's equity and changes in cash
flow for the periods ended on such dates.
"Prohibited Transaction" means any transaction described in Section 406 of ERISA
which is not exempt by reason of Section 408 of ERISA, and any transaction
described in Section 4975(c) of the IRC which is not exempt by reason of Section
4975(c)(2) of the IRC.
"Receivable Loans" has the meaning set forth on the Schedule.
"Receivables" means all of each Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), proceeds of any letters of
credit naming such Borrower as beneficiary, contract rights, chattel paper,
instruments, documents and all other forms of obligations at any time owing to
such Borrower, all guaranties and other security therefor, whether secured or
unsecured, all merchandise returned to or repossessed by such Borrower, and all
rights of stoppage in transit and all other rights or remedies of an unpaid
vendor, lienor or secured party.
"Renewal Term" has the meaning set forth on the Schedule.
"Reportable Event" means a reportable event described in Section 4043 of ERISA
or the regulations thereunder, a withdrawal from a Plan described in Section
4063 of ERISA, or a cessation of operations described in Section 4068(f) of
ERISA.
"Subordinated Debt" means liabilities of a Borrower the repayment of which is
subordinated, to the payment and performance of the Obligations, pursuant to a
subordination agreement on Lender's standard form.
"Subordinating Creditor" means the persons set forth on the Schedule.
"Subordination Agreement" means the Subordination Agreement dated March ___,
1997, by and between the Subordinating Creditor and Lender, as such
Subordination Agreement may be amended, supplemented or otherwise modified from
time to time.
"Total Contractual Debt Service" means, for any period, the sum of payments made
or required to be made by any Borrower during such period for interest and
scheduled principal payments due on the Indebtedness.
"Total Facility" has the meaning set forth on the Schedule.
"Trademarks, Licenses and Patents" means all of each Borrower's right, title and
interest in and to: (i) trademarks, trademark registrations, trade names, trade
name registrations, and trademark or trade name applications, including without
limitation such as are listed on the Schedule, attached hereto and made a part
hereof, as the same may be amended from time to time, and (a) renewals thereof,
(b) all income, royalties, damages and payments now and hereafter due and/or
payable with respect thereto, including, without limitation, damages and
payments for past or future infringements thereof, (c) the right to sue for
past, present and future infringements thereof, (d) all rights corresponding
thereto throughout the world, and (e) the goodwill of the business operated by
Assignor connected with and symbolized by any trademarks or trade names; (ii)
license agreements, including without limitation such as are listed on the
<PAGE>
Schedule attached hereto and made a part hereof, and the right to prepare for
sale, sell, and advertise for sale any Inventory now or hereafter owned by
Assignor and now or hereafter covered by such licenses; and (iii) patents and
patent applications, registered or pending, including without limitation such as
are listed on the Schedule, attached hereto, together with all income,
royalties, shop rights, damages and payments thereto, the right to sue for
infringements thereof, and all rights thereto throughout the world and all
reissues, divisions, continuations, renewals, extensions and
continuations-in-part thereof, and the goodwill of the business connected with
the use of and symbolized by such patents.
18.2 Other Terms. All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with generally accepted accounting principles, consistently applied. All other
terms contained in this Agreement, unless otherwise indicated, shall have the
meanings provided by the Code, to the extent such terms are defined therein.
19. MISCELLANEOUS.
19.1 Recourse to Security; Certain Waivers. All Obligations shall be
payable by each Borrower as provided for herein and, in full, at the termination
of this Agreement; recourse to security will not be required at any time. Each
Borrower waives presentment and protest of any instrument and notice thereof,
notice of default and, to the extent permitted by applicable law, all other
notices to which such Borrower might otherwise be entitled.
19.2 No Waiver by Lender. Lender's failure to exercise any right,
remedy or option under this Agreement or any supplement or other agreement
between Lender and Borrowers or delay by Lender in exercising the same will not
operate as a waiver. No waiver by Lender will be effective unless in writing and
then only to the extent stated. No waiver by Lender shall affect its right to
require strict performance of this Agreement. Lender's rights and remedies will
be cumulative and not exclusive.
19.3 Binding on Successor and Assigns. All terms, conditions, promises,
covenants, provisions and warranties shall inure to the benefit of and bind
Lender's and Borrowers' respective representatives, successors and assigns.
19.4 Severability. If any provision of this Agreement shall be
prohibited or invalid under applicable law, it shall be ineffective only to such
extent, without invalidating the remainder of this Agreement.
19.5 Amendments; Assignments. This Agreement may not be modified,
altered or amended, except by an agreement in writing signed by each Borrower
and Lender. No Borrower may sell, assign or transfer any interest in this
Agreement or any other Loan Document, or any portion thereof, including, without
limitation, any of such Borrower's rights, title, interests, remedies, powers
and duties hereunder or thereunder. Each Borrower hereby consents to Lender's
participation, sale, assignment, transfer or other disposition, at any time or
times hereafter, of this Agreement and any of the other Loan Documents, or of
any portion hereof or thereof, including, without limitation, Lender's rights,
title, interests, remedies, powers and duties hereunder or thereunder. In
connection therewith, Lender may disclose all documents and information which
Lender now or hereafter may have relating to any Borrower or any Borrower's
business. To the extent that Lender assigns its rights and obligations hereunder
to a third party, Lender shall thereafter be released from such assigned
obligations to any Borrower and such assignment shall effect a novation between
such Borrower and such third party.
19.6 Integration. This Agreement, together with the Schedule (which is
a part hereof) and the other Loan Documents, reflect the entire understanding of
the parties with respect to the transactions contemplated hereby.
19.7 Governing Law; Waivers. THIS AGREEMENT SHALL BE DEEMED TO HAVE
BEEN MADE IN THE STATE OF ARIZONA AND SHALL BE INTERPRETED IN ACCORDANCE WITH
THE INTERNAL LAWS OF ARIZONA AND NOT THE CONFLICT OF LAWS RULES OF THE STATE OF
<PAGE>
ARIZONA GOVERNING CONTRACTS TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. EACH
BORROWER HEREBY AGREES TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL
COURT LOCATED WITHIN THE COUNTY OF MARICOPA, STATE OF ARIZONA OR, AT THE SOLE
OPTION OF LENDER, IN ANY OTHER COURT IN WHICH LENDER SHALL INITIATE LEGAL OR
EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER
IN CONTROVERSY. EACH BORROWER WAIVES ANY OBJECTION OF FORUM NON CONVENIENS AND
VENUE. EACH BORROWER FURTHER WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON
IT, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE IN THE MANNER SET
FORTH IN SECTION 19.13 HEREOF FOR THE GIVING OF NOTICE.
19.8 Survival. All of the representations and warranties of each
Borrower contained in this Agreement shall survive the execution, delivery and
acceptance thereof by the parties. No termination of this Agreement or of any
guaranty of the Obligations shall affect or impair the powers, obligations,
duties, rights, representations, warranties or liabilities of the parties hereto
and all shall survive such termination.
19.9 Evidence of Obligations. Each Obligation may, in Lender's
discretion, be evidenced by notes or other instruments issued or made by
Borrowers, or any of them, to Lender. If not so evidenced, such Obligation shall
be evidenced solely by entries upon Lender's books and records.
19.10 Collateral Security. The Obligations shall constitute one loan
secured by the Collateral. Lender may, in its sole discretion, (i) exchange,
enforce, waive or release any of the Collateral, (ii) apply Collateral and
direct the order or manner of sale thereof as it may determine and (iii) settle,
compromise, collect or otherwise liquidate any Collateral in any manner without
affecting its right to take any other action with respect to any other
Collateral.
19.11 Application of Collateral. Lender shall have the continuing and
exclusive right to apply or reverse and re-apply any and all payments to any
portion of the Obligations. To the extent that any Borrower makes a payment or
Lender receives any payment or proceeds of the Collateral for any Borrower's
benefit which is subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to a trustee, debtor in
possession, receiver or any other party under any bankruptcy law, common law or
equitable cause, then, to such extent, the Obligations or part thereof intended
to be satisfied shall be revived and continue as if such payment or proceeds had
not been received by Lender.
19.12 Loan Requests. Each oral or written request for a loan by any
Person who purports to be any employee, officer or authorized agent of any
Borrower shall be made to Lender on or prior to 11:00 a.m., Philadelphia time,
on the Business Day on which the proceeds thereof are requested to be paid to
such Borrower and shall be conclusively presumed to be made by a Person
authorized by such Borrower to do so and the crediting of a loan to such
Borrower's operating account shall conclusively establish Borrowers' obligation
to repay such loan. Unless and until Borrowers otherwise direct Lender in
writing, all loans shall be wired to Borrowers' operating account set forth on
the Schedule.
19.13 Notices. Any notice required hereunder shall be in writing and
addressed to the Borrowers (and Borrowers' legal counsel at Jacoby Donner, P.C.,
Suite 2000, 1515 Market Street, Philadelphia, Pennsylvania 19102, Attention:
Mary F. Walrath, Esq.) and Lender at their addresses set forth at the beginning
of this Agreement. Notices hereunder shall be deemed received on the earlier of
receipt, whether by mail, personal delivery, facsimile, or otherwise, or three
(3) days after deposit in the United States mail, postage prepaid.
19.14 Brokerage Fees. Each Borrower represents and warrants to Lender
that, with respect to the financing transaction herein contemplated, no Person
is entitled to any brokerage fee or other commission and each Borrower agrees to
indemnify and hold Lender harmless against any and all such claims.
<PAGE>
19.15 Disclosure. No representation or warranty made by any Borrower in
this Agreement, or in any financial statement, report, certificate or any other
document furnished in connection herewith contains any untrue statement of a
material fact or omits to state any material fact necessary to make the
statements herein or therein not misleading. There is no fact known to any
Borrower or which reasonably should be known to any Borrower which any Borrower
has not disclosed to Lender in writing with respect to the transactions
contemplated by this Agreement which materially and adversely affects the
business, assets, operations, prospects or condition (financial or otherwise),
of any Borrower.
19.16 Publicity. Lender is hereby authorized to issue appropriate press
releases and to cause a tombstone to be published announcing the consummation of
this transaction and the aggregate amount thereof.
19.17 Captions. The Section titles contained in this Agreement are
without substantive meaning and are not part of this Agreement.
19.18 Injunctive Relief. Each Borrower recognizes that, in the event
any Borrower fails to perform, observe or discharge any of its Obligations under
this Agreement, any remedy at law may prove to be inadequate relief to Lender.
Therefore, Lender, if it so requests, shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages.
19.19 Counterparts. This Agreement may be executed in one or more
counterparts, each of which taken together shall constitute one and the same
instrument.
19.20 Construction. The parties acknowledge that each party and its
counsel have reviewed this Agreement and that the normal rule of construction to
the effect that any ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this Agreement or any amendments
or exhibits hereto.
19.21 Time of Essence. Time is of the essence for the performance by
Borrowers of the Obligations set forth in this Agreement.
19.22 Limitation of Actions. Each Borrower agrees that any claim or
cause of action by such Borrower against Lender, or any of Lender's directors,
officers, employees, agents, accountants or attorneys, based upon, arising from,
or relating to this Agreement, or any other present or future agreement, or any
other transaction contemplated hereby or thereby or relating hereto or thereto,
or any other matter, cause or thing whatsoever, whether or not relating hereto
or thereto, occurred, done, omitted or suffered to be done by Lender, or by
Lender's directors, officers, employees, agents, accountants or attorneys,
whether sounding in contract or in tort or otherwise, shall be barred unless
asserted by such Borrower by the commencement of an action or proceeding in a
court of competent jurisdiction by the filing of a complaint within one (1) year
after the first act, occurrence or omission upon which such claim or cause of
action, or any part thereof, is based and service of a summons and complaint on
an officer of Lender or any other person authorized to accept service of process
on behalf of Lender, within thirty (30) days thereafter. Each Borrower agrees
that such one (1) year period of time is a reasonable and sufficient time for a
Borrower to investigate and act upon any such claim or cause of action. The one
(1) year period provided herein shall not be waived, tolled, or extended except
by a specific written agreement of Lender. This provision shall survive any
termination of this Loan Agreement or any other agreement.
19.23 Liability. Neither Lender nor any Lender Affiliate shall be
liable for any indirect, special, incidental or consequential damages in
connection with any breach of contract, tort or other wrong relating to this
Agreement or the Obligations or the establishment, administration or collection
thereof (including without limitation damages for loss of profits, business
interruption, and the like), whether such damages are foreseeable or
unforeseeable, even if Lender has been advised of the possibility of such
damages. Neither Lender, nor any Lender Affiliate shall be liable for any
<PAGE>
claims, demands, losses or damages, of any kind whatsoever, made, claimed,
incurred or suffered by the any Borrower through the ordinary negligence of
Lender, or any Lender Affiliate. "Lender Affiliate" shall mean Lender's
directors, officers, employees, agents, attorneys and any other person or entity
affiliated with or representing Lender.
19.24 Notice of Breach by Lender. Each Borrower agrees to give Lender
written notice of (i) any action or inaction by Lender or any attorney of Lender
in connection with any Loan Documents that may be actionable against Lender or
any attorney of Lender or (ii) any defense to the payment of the Obligations for
any reason, including, but not limited to, commission of a tort or violation of
any contractual duty or duty implied by law. Each Borrower agrees that unless
such notice is fully given as promptly as possible (and in any event within
thirty (30) days) after such Borrower has knowledge, or with the exercise of
reasonable diligence should have had knowledge, of any such action, inaction or
defense, such Borrower shall not assert, and such Borrower shall be deemed to
have waived, any claim or defense arising therefrom.
19.25 Application of Insurance Proceeds. The net proceeds of any
casualty insurance insuring the Collateral, after deducting all costs and
expenses (including attorneys' fees) of collection, shall be applied, at
Lender's option, either toward replacing or restoring the Collateral, in a
manner and on terms satisfactory to Lender, or toward payment of the
Obligations. Any proceeds applied to the payment of Obligations shall be applied
in such manner as Lender may elect. In no event shall such application relieve
any Borrower from payment in full of all installments of principal and interest
which thereafter become due in the order of maturity thereof.
<PAGE>
19.26 MUTUAL WAIVER OF RIGHT TO JURY TRIAL. LENDER AND EACH BORROWER
EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED
UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (i) THIS AGREEMENT; OR (ii) ANY
OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT AMONG LENDER AND BORROWERS, OR
ANY OF THEM; OR (iii) ANY CONDUCT, ACTS OR OMISSIONS OF LENDER OR ANY BORROWER
OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER
PERSONS AFFILIATED WITH LENDER OR ANY BORROWER; IN EACH OF THE FOREGOING CASES,
WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
Borrowers:
CORE TECHNOLOGIES (PENNSYLVANIA), INC.
By____________________________________
Title_________________________________
Federal Tax I.D. No. 22-253-7194
MARIS EQUIPMENT CO., INC.
By____________________________________
Title_________________________________
Federal Tax I.D. No. 23-272-6852
AIRO CLEAN, INC.
By____________________________________
Title_________________________________
Federal Tax I.D. No. 23-271-1953
Lender:
FINOVA CAPITAL CORPORATION
By____________________________________
Title_________________________________
<PAGE>
EXHIBIT 10.2
SUBORDINATED NOTE
Core Technologies, Inc.
$887,000 August 25, 1995
FOR VALUE RECEIVED, the sufficiency and receipt of which is hereby
acknowledged, Core Technologies, Inc., a Delaware corporation (the "Borrower"),
promises to pay to the order of Safeguard Scientifics (Delaware), Inc., a
Delaware corporation (hereinafter, together with any holder, called the
"Holder"), at the Holder's office located at 103 Springer Building, 3411
Silverside Road, Wilmington, Delaware 19803, or at such other place in the
continental United States as the Holder may designate in writing, in lawful
money of the United States, and in immediately available funds, the principal
sum of Eight Hundred Eighty-Seven Thousand Dollars ($887,000), together with
interest thereon at the rate and payable as hereinafter set forth.
1. Payment of Principal; Maturity Date. The principal of this Note,
together will all accrued interest thereon, shall be due and payable on December
31, 2000 ("Maturity Date").
2. Payment of Interest. The Borrower hereby further promises to pay to
the order of the Holder interest on the outstanding principal amount from the
date hereof, at an annual rate equal to Six Percent (6%). Interest payable
hereunder shall be calculated for actual days elapsed on the basis of a 360-day
year.
Interest shall be payable when the unpaid principal balance of the Note
is paid, and shall be due and payable on the Maturity Date.
In addition, after the Maturity Date or any Event of Default, interest
shall continue to accrue on this Note (to the extent legally enforceable) at a
rate of Eight Percent (8%) per annum, and shall be payable together with payment
of principal, on demand of the Holder.
Notwithstanding anything in this Note, the interest rate charged hereon
shall not exceed the maximum rate allowable by applicable law. If any stated
interest rate herein exceeds the maximum allowable rate, then the interest rate
shall be reduced to the maximum allowable rate, and any excess payment of
interest made by the Borrower at any time shall be applied to the unpaid balance
of any outstanding principal of this Note.
3. Subordination of Note. The Borrower's obligations under this Note,
regardless of whether demand for payment has been made by the Holder, are
subject to and subordinate to the Borrower's obligations under loan agreements
presently existing or which may
<PAGE>
in the future exist between the Borrower and its other lenders.
4. Prepayments. The outstanding principal amount of this Note may be
prepaid in whole or in part without any prepayment penalty or premium at any
time or from time to time by the Borrower upon notice to the Holder; provided,
that upon such payment any interest due to the date of such prepayment on such
prepaid amount shall also be paid
5. Method and Application of Payments. All amounts payable hereunder
shall be paid by the Borrower in lawful money of the United States of America by
certified check or wire transfer in immediately available and freely
transferable funds at the place designated by Holder in writing to Borrower for
such payment. All payments made on this Note (including, without limitation,
prepayments) shall be applied, at the option of the Holder, first to late
charges and collection costs, if any, then to accrued interest, and then to
principal.
6. Forgiveness of Note. The principal of this Note, together with all
accrued interest thereon, will be forgiven by the Holder if and only if all and
of the Safeguard Guarantees have been eliminated before or by the Maturity Date.
As used herein, the "Safeguard Guarantees" means (i) the letters of credit
issued on the account of Safeguard Scientifics (Delaware) Inc. in the aggregate
amount of $4.5 Million, which letters of credit support certain obligations of
the Borrower in connection with the reorganization of its security business and
the sale of its furniture business in 1995, and (ii) any other letters of
credit, guarantees or other similar obligations of the Holder subsequently
entered into by the Holder for the benefit of the Borrower. The Safeguard
Guarantees shall be eliminated only when Safeguard Scientifics (Delaware), Inc.
receives written notice from the applicable issuer of each letter of credit that
such letter of credit has been returned to it for cancellation and that
therefore such letter of credit has been terminated by the issuer or receives
notice from the applicable beneficiary of the guarantee or similar obligation
that such guarantee or similar obligation has been terminated by the beneficiary
thereof and/or is no longer in effect.
7. Affirmative Covenants. The Borrower agrees that from the date of
execution of this Note until the earlier of (i) all obligations hereunder are
satisfied in full or (ii) forgiveness of the Note pursuant to Paragraph 6 above,
the Borrower shall (and shall cause each of its majority-owned subsidiaries, if
any, to):
(a) Payment of Taxes and Other Charges. Pay and discharge when due all
indebtedness and all taxes, assessments, charges, levies and other liabilities
imposed upon the Borrower, its income, profits, properties or business, except
those which currently are being contested in good faith by appropriate
proceedings and for which the Borrower shall have set aside adequate reserves or
made other adequate provisions acceptable to the Holder in its sole discretion.
(b) Maintenance of Existence, Operation and Assets;
<PAGE>
Inspection. Do all things necessary to maintain, renew and keep in full force
and effect its organizational existence and all rights, permits and franchises
necessary to enable it to continue its business; continue in operation in
substantially the same manner as at present; conduct business and enter into
transactions only in the ordinary course, consistent with past practices; keep
its properties in good operating condition and repair; make all necessary and
proper repairs, renewals, replacements, additions and improvements thereto; and
permit representatives of the Holder to inspect the Borrower's properties and
its books and records and to make extracts therefrom at all reasonable times.
(c) Compliance with Laws. Comply with all laws applicable to the
Borrower and to the operation of its business (including, without limitation,
any statute, rule or regulation relating to employment practices and employee
benefits and to environmental, occupational and health standards and controls.
(d) Financial Reports. Deliver promptly such financial statements and
reports as the Holder may reasonably request including, without limitation,
annual financial statements audited or reviewed by independent certified public
accountants and interim financial statements prepared by the Borrower's
management. All such financial data shall be true, accurate and complete in all
material respects and shall be prepared in accordance with generally accepted
accounting principles in effect from time to time, consistently applied from
period to period, and shall contain such detail as the Holder may reasonably
require.
(e) Additional Reports. Provide prompt notice to the Holder of the
occurrence of any of the following (together with a description of the action
which the Borrower proposes to take with respect thereto): (i) any Event of
Default or potential Event of Default hereunder; (ii) any litigation filed by or
against the Borrower; or (iii) any event which might result in a material
adverse change in the Borrower's business, assets, operations, financial
condition or results of operations.
8. Event of Default.
(a) Any of the following shall constitute an event of default ("Event
of Default") hereunder:
(i) a default in the payment by the Borrower to the Holder of
principal or interest under this Note as and when the same
shall become due and payable;
(ii) a default by the Borrower in the performance of any
covenant set forth in Paragraph 7 hereof, which default
continues uncured for ten (10) days after written notice
thereof to the Borrower given by the Holder (or, if such
default cannot reasonably be cured within such ten (10)
day period and the Borrower is proceeding to cure with
reasonable diligence, such period of time as shall be
reasonably necessary to cure such default, but in no event
more than thirty (30) days);
<PAGE>
(iii) an event of default by the Borrower under any other
obligation, instrument, note or agreement for borrowed
money, beyond any applicable notice and/or grace period;
or
(iv) institution of any proceeding by or against the Borrower
under any present or future bankruptcy or insolvency
statute or similar law and, if involuntary, if the same
are not stayed or dismissed within sixty (60) days, or the
Borrower's assignment for the benefit of creditors or the
appointment of a receiver, trustee, conservator or other
judicial representative for the Borrower or the Borrower's
property or the Borrower's being adjudicated a bankrupt or
insolvent.
(b) Upon the occurrence of an Event of Default hereunder, this Note
shall automatically without any action or notice by the Holder, be accelerated
and become immediately due and payable, and the Holder shall have all of the
rights and remedies available at law or in equity, or under any other agreement,
all of which remedies shall be cumulative.
(c) Neither the reference to nor the provisions of any agreement or
document referred to herein shall affect or impair the absolute and
unconditional obligation of the Borrower to pay the principal of and interest on
this Note as herein provided.
9. Dispute Resolution. Any action, suit or proceeding where the amount
in controversy as to at least one party, exclusive of interest and costs,
exceeds $1,000,000 ("Summary Proceeding"), arising out of or relating to the
obligations of the Borrower to the Holder set forth herein, or the breach,
termination or validity thereof, shall be litigated exclusively in the Superior
Court of the State of Delaware (the "Delaware Superior Court") as a summary
proceeding pursuant to Rules 124-131 of the Delaware Superior Court, or any
successor rules (the "Summary Proceeding Rules"). Each of the parties hereto
hereby irrevocably and unconditionally (i) submits to the jurisdiction of the
Delaware Superior Court for any Summary Proceeding, (ii) agrees not to commence
any Summary Proceeding except in the Delaware Superior Court, (iii) waives, and
agrees not to plead or to make, any objection to the venue of any Summary
Proceeding in the Delaware Superior Court, (iv) waives, and agrees not to plead
or to make, any claim that any Summary Proceeding brought in the Delaware
Superior Court has been brought in an improper or otherwise inconvenient forum,
(v) waives, and agrees not to plead or to make, any claim that the Delaware
Superior Court lacks personal jurisdiction over it, (vi) waives its right to
remove any Summary Proceeding to the federal courts except where such courts are
vested with sole and exclusive jurisdiction by statute and (vii) understands and
agrees that it shall not seek a jury trial or punitive damages in any Summary
Proceeding based upon or arising out of or otherwise related to the obligations
and waives any and all rights to any such jury trial or to seek punitive
damages.
<PAGE>
In the event any action, suit or proceeding where the amount in
controversy as to at least one party, exclusive of interest and costs, does not
exceed $1,000,000 (a "Proceeding"), arising out of or relating to the
obligations or the breach, termination or validity thereof is brought, the
parties to such Proceeding agree to make application to the Delaware Superior
Court to proceed under the Summary Proceeding Rules. Until such time as such
application is rejected, such Proceeding shall be treated as a Summary
Proceeding and all of the foregoing provisions of this Section relating to
Summary Proceedings shall apply to such Proceeding.
If a Summary Proceeding is not available to resolve any dispute
hereunder, the controversy or claim shall be settled by arbitration conducted on
a confidential basis, under the U.S. Arbitration Act, if applicable, and the
then current Commercial Arbitration Rules of the American Arbitration
Association (the "Association") strictly in accordance with the terms of this
Agreement and the substantive law of the State of Delaware. The arbitration
shall be conducted at the Association's regional office located closest to the
Holder's principal place of business by three arbitrators, at least one of whom
shall be an attorney with substantial experience in creditor-debtor law.
Judgment upon the arbitrators' award may be entered and enforced in any court of
competent jurisdiction. Neither party shall institute a proceeding hereunder
unless at least 60 days prior thereto such party shall have given written notice
to the other party of its intent to do so.
Neither party shall be precluded hereby from securing equitable
remedies in courts of any jurisdiction, including, but not limited to, temporary
restraining orders and preliminary injunctions to protect its rights and
interests but such shall not be sought as a means to avoid or stay arbitration
or Summary Proceedings.
Each of the parties hereto agrees to accept service of process in any
Proceeding or Summary Proceeding at its address set forth in Paragraph 10(b)
below, and agrees not to plead or to make any objection to such service of
process in the Delaware Superior Court.
10. Miscellaneous.
(a) The Borrower hereby waives presentment, demand, protest and notice
of dishonor and protest, and also waives all other exemptions; and agrees that
extension or extensions of the time of payment of this Note or any installment
or part thereof may be made before, at or after the Maturity Date by agreement
by the Holder. Upon default hereunder the Holder shall have the right to offset
the amount owed by the Borrower against any amounts owed by the Holder in any
capacity to the Borrower, whether or not due, and the Holder shall be deemed to
have exercised such right of offset and to have made a charge against any such
account or amounts immediately upon the occurrence of an Event of Default
hereunder even though such charge is made or entered on the books of the Holder
subsequent thereto. The Borrower shall
<PAGE>
pay to the Holder, upon demand, all costs and expenses, including, without
limitation, attorneys' fees and legal expenses, that may be incurred by the
Holder in connection with the enforcement of this Note.
(b) Notices required to be given hereunder shall be deemed validly
given (i) three business days after sent, postage prepaid, by certified mail,
return receipt requested, (ii) one business day after sent, charges paid by the
sender, by Federal Express Next Day Delivery or other guaranteed delivery
service, (iii) when sent by facsimile transmission during normal business hours,
or (iv) when delivered by hand:
If to the Holder:
Safeguard Scientifics (Delaware), Inc.
c/o Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, Pennsylvania 19087
Attention: Senior Vice President, Finance
Fax No.: (610) 995-0325
If to the Borrower:
Core Technologies, Inc.
c/o Maris Equipment Company
110 Summit Drive
Exton, Pennsylvania 19341
Attention: Vice President, Finance and
Treasurer
Fax No.: (610) 524-7434
or to such other address, or in care of such other person, as the Holder or the
Borrower shall hereafter specify to the other from time to time by due notice.
(c) Any failure by the Holder to exercise any right hereunder shall not
be construed as a waiver of the right to exercise the same or any other right at
any time. No amendment to or modification of this Note shall be binding upon the
Holder unless in writing and signed by it. Any provision hereof found to be
illegal, invalid or unenforceable for any reason whatsoever shall not affect the
validity, legality or enforceability of the remainder hereof. This Note shall
apply to and bind the successors of the Borrower and shall inure to the benefit
of the Holder, its successors and assigns.
(d) This Note shall be governed by and interpreted in accordance with
the laws of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, the Borrower, by its duly authorized officer
intending to be legally bound hereby, has duly executed this Subordinated Note
as of the date first written above.
ATTEST: CORE TECHNOLOGIES, INC.
________________________ By:___________________________
Name:_________________________
Title:________________________
<PAGE>
SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT ("Agreement"), dated as of March
__, 1997, entered into between Safeguard Scientifics (Delaware), Inc.
("Creditor") and FINOVA Capital Corporation ("Lender").
W I T N E S S E T H
WHEREAS, Creditor is financially interested in Core
Technologies, Inc., a Delaware corporation ("Company"), in that Company is
indebted to Creditor in the aggregate original principal amount of Eight Hundred
Seventy-Seven Thousand Dollars and No/100 ($877,000) pursuant to the terms of
that certain Subordinated Note executed by Company in favor of Creditor (the
"Subordinated Note"), a copy of which is attached hereto as Exhibit A;
WHEREAS, Company may become indebted to Lender in connection
with the advances of monies and other financial arrangements by Lender to
Company;
WHEREAS, such advances of monies and other financial
arrangements are evidenced by various agreements, instruments and documents,
including, without limitation, that certain Loan and Security Agreement of even
date herewith among Company, Airo Clean, Inc., Maris Equipment Company, Inc. and
Lender (the "Loan Agreement");
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by Creditor, Creditor
hereby agrees with Lender as hereinafter set forth.
1. Standby; Subordination; Subrogation. Creditor will not ask,
demand, sue for, take or receive from Company or any other party, by setoff or
in any other manner:
(a) The whole or any part of any indebtedness, obligations and
liabilities which may now or hereafter be owing by Company, or any successor or
assign of Company, including, without limitation, a receiver, trustee or debtor
in possession (the term "Company" hereinafter shall include any such successor
and assign of Company), to Creditor (all such indebtedness, obligations and
liabilities being hereinafter referred to as the "Subordinated Debt"); or
(b) Any security for any of the foregoing;
<PAGE>
unless and until all obligations, liabilities, and indebtedness of Company to
Lender, whether now existing or hereafter arising directly between Company and
Lender, or acquired outright, conditionally or as collateral security from
another by Lender, shall have been fully paid and satisfied in cash with
interest, including, without limitation, any interest accruing after the
commencement of insolvency proceedings with respect to Company, whether or not
such interest is allowed as a claim in such proceeding (all such obligations,
indebtedness and liabilities of Company to Lender being hereinafter referred to
as the "Senior Debt"; provided, that the Senior Debt shall not include the
principal amount of indebtedness in excess of Ten Million Dollars ($10,000,000)
(but Senior debt shall include all fees, interest and expenses owing to Lender,
regardless of whether Lender has made advances to pay such interest, fees and
expenses)) and all financing arrangements between Company and Lender have been
terminated. Creditor shall not have any lien or security interest in any of the
assets of Company, and all liens and security interests of Creditor, whether now
or hereafter arising and howsoever existing, in any assets of Company or any
assets securing the Senior Debt shall be and hereby are subordinated to the
rights and interests of Lender in those assets irrespective of whether Lender's
liens and security interests have been perfected, or the time or order of
attachment or perfection of liens or security interests, or the time of filing
or recording of financing statements, mortgages or other agreements or
documents, or the time of giving or failure to give notice of acquisition of
purchase money or other security interests or liens; Creditor shall not have any
right to possession of any such assets, to notify account debtors of Company or
to foreclose upon or exercise any other right or remedy with respect to any such
assets, whether by judicial action or otherwise, unless and until all of the
Senior Debt shall have been fully paid and satisfied in cash and all financing
arrangements between Company and Lender have been terminated. Creditor also
hereby agrees that, (i) the Senior Debt shall include all obligations,
indebtedness and liabilities of Company to Lender, notwithstanding the
invalidity or unenforceability of all or any part of the Senior Debt, or any
right or power of Company or any other entity or individual to assert any claim
or defense as to the invalidity or unenforceability of any such obligation,
indebtedness or liability and no such claim or defense shall affect or impair
the agreements and obligations of Creditor hereunder; and (ii) regardless of
whether the Senior Debt is secured or unsecured, Lender shall be subrogated for
Creditor with respect to Creditor's claims with respect to the Subordinated Debt
against Company and Creditor's rights, liens and security interests, if any, in
any of Company's assets and the proceeds thereof until all of the Senior Debt
shall have been fully paid and satisfied in cash and all financing arrangements
between Company and Lender have been terminated.
2. Subordinated Debt Owed Only to Creditor. Creditor warrants
and represents that Creditor has not previously assigned or transferred any
interest in the Subordinated Debt, that no other party owns an interest in the
Subordinated Debt other than Creditor and that the entire Subordinated Debt is
owing only to Creditor and covenants that the entire Subordinated Debt shall
continue to be owing only to Creditor unless assigned or transferred subject to
the terms of this Agreement. Creditor will not, without the prior written
consent of Lender: (A) cancel, waive, forgive, or subordinate to any other
indebtedness of Company (other than the Senior Debt), any of the Subordinated
Debt or any rights in respect thereof; (b) take any collateral security for any
of the Subordinated Debt; or (c) commence, or join with any other creditor in
commencing, any bankruptcy, reorganization or insolvency proceedings with
respect to Company.
<PAGE>
3. Lender Priority; Grant of Authority to Lender. In the event
of any distribution, division or application, partial or complete, voluntary or
involuntary, by operation of law or otherwise, of all or any part of the assets
of Company or the proceeds thereof to the creditors of Company or readjustment
of the obligations and indebtedness of Company, whether by reason of
liquidation, bankruptcy, arrangement, receivership, assignment for the benefit
of creditors or any other action or proceeding involving the readjustment of all
or any part of the Subordinated Debt, or the application of the assets of
Company to the payment or liquidation thereof, or upon the dissolution,
liquidation, cessation or other winding up of Company's business, or upon the
sale of all or substantially all of Company's assets, then, and in any such
event, (i) Lender shall be entitled to receive payment in cash in full of any
and all of the Senior Debt then owing prior to the payment of all or any part of
the Subordinated Debt and (ii) any payment or distribution of any kind or
character, whether in cash, securities or other property, which shall be payable
or deliverable upon or with respect to any or all of the Subordinated Debt shall
be paid or delivered directly to Lender for application on any of the Senior
Debt, due or not due, until such Senior Debt shall have first been fully paid
and satisfied in cash. Lender is hereby irrevocably authorized and empowered, in
its discretion, to make and present for and on behalf of Creditor such proofs of
claim against Company on account of the Subordinated Debt as Lender may deem
expedient or proper and to vote such proofs of claim in any such proceeding and
to receive and collect any and all dividends or other payments or disbursements
made thereon in whatever form the same may be paid or issued and to apply the
same on account of any of the Senior Debt. Creditor irrevocably authorizes and
empowers Lender to demand, sue for, collect and receive each of the aforesaid
payments and distributions and give acquaintance therefor and to file claims and
take such other actions, in Lender's own name or in the name of Creditor or
otherwise, as Lender may deem necessary or advisable for the enforcement of this
Agreement; and Creditor will execute and deliver to Lender such powers of
attorney, assignments and other instruments or documents, including notes
(together with such assignments or endorsements as Lender shall deem necessary
or appropriate) as may be requested by Lender in order to enable Lender to
enforce any and all claims upon or with respect to any or all of the
Subordinated Debt and to collect and receive any and all payments and
distributions which may be payable or deliverable at any time upon or with
respect to the Subordinated Debt, all for Lender's own benefit. Following
payment in full of the Senior Debt in cash, Lender will remit to Creditor, to
the extent of Creditor's interest therein, all dividends or other payments or
distributions paid to and held by Lender in excess of the Senior Debt.
4. Payments Received by Creditor. Should any payment,
distribution, security or instrument, or any proceeds thereof, be received by
Creditor upon or with respect to the Subordinated Debt prior to the satisfaction
of all of the Senior Debt in cash and termination of all financing arrangements
between Company and Lender, Creditor shall receive and hold the same in trust,
as trustee, for the benefit of Lender and shall forthwith deliver the same to
Lender in precisely the form received (except for the endorsement or assignment
by Creditor where necessary), for application on any of the Senior Debt, due or
not due, and, until so delivered, the same shall be held in trust by Creditor as
the property of Lender. In the event of the failure of Creditor to make any such
endorsement or assignment to Lender, Lender, or any of its officers or
employees, is hereby irrevocably authorized to make the same.
<PAGE>
5. Instrument Legend; Amendments. Any instrument or
certificate evidencing any of the Subordinated Debt, or any portion thereof,
will be inscribed with a legend conspicuously indicating that payment thereof is
subordinated to the claims of Lender pursuant to the terms of this Agreement,
and a copy thereof will be delivered to Lender. Any instrument or certificate
evidencing any of the Subordinated Debt, or any portion thereof, which is
hereafter executed by Company will, on the date thereof, be inscribed with the
aforesaid legend and a copy thereof will be delivered to Lender on the date of
its execution or within five (5) business days thereafter and the original
thereof will be delivered as and when described hereinabove.
6. Continuing Nature of Subordination; Subrogation. This
Agreement shall be irrevocable and shall continue to be effective
(notwithstanding the insolvency, liquidation or dissolution of Company) until
the Senior Debt shall have been paid in cash in full and all financing
arrangements between Company and Lender have been terminated. This is a
continuing agreement of subordination and Lender may continue, at any time and
without notice to Creditor, to extend credit or other financial accommodations
and loan monies to or for the benefit of Company on the faith hereof. This
Agreement shall continue to be effective or be reinstated, as the case may be,
if at any time any payment of any of the Senior Debt is rescinded or must
otherwise be returned by any holder of Senior Debt, all as though such payment
had not been made. Upon the payment in full in cash of all Senior Debt and
termination of all financing arrangements between Company and Lender, Creditor
shall be subrogated to the extent of the payments or distributions made to
Lender, or otherwise applied to payment of, the Senior Debt pursuant to the
provisions of this Agreement.
7. Additional Agreements Between Company and Lender. Lender
may, at any time and from time to time, without notice to Creditor, enter into
such agreement or agreements with Company as Lender may deem proper, extending
the time of payment of or renewing or otherwise altering, amending, modifying or
supplementing the terms of the Loan Agreement, other agreements, instruments and
documents evidencing the Senior Debt or all or any of the Senior Debt or
affecting the collateral or any guaranty underlying any or all of the Senior
Debt, and may exchange, sell, release, surrender or otherwise deal with any such
security or guaranties, without in any way thereby impairing or affecting this
Agreement.
8. Creditor's Waivers. Creditor expressly waives all notice of
(i) the existence or creation or non-payment of all or any portion of the Senior
Debt and (ii) the acceptance by Lender of the subordination and other provisions
of this Agreement and all the notices not specifically required pursuant to the
terms of this Agreement whatsoever and Creditor expressly waives reliance by
Lender upon the subordination and other agreements as herein provided. This
Agreement shall remain valid and effective and the provisions of this Agreement
shall apply to Creditor and Lender regardless of the validity, enforceability or
priority of the Senior Debt or any liens securing the Senior Debt. Creditor
agrees that Lender has made no warranties or representations with respect to the
due execution, legality, validity, completeness or enforceability of the Loan
<PAGE>
Agreement, or the collectibility of the Senior Debt, that Lender shall be
entitled to manage and supervise its financial arrangements with Company without
affecting the validity or enforceability of this Agreement and without regard to
the existence of any rights that Creditor may now or hereafter have in or to any
of the assets of Company, and that Lender shall have no liability to Creditor
for, and waives any claim which Creditor may now or hereafter have against,
Lender arising out of (i) any and all actions which Lender takes or omits to
take (including, without limitation, actions with respect to the creation,
perfection or continuation of liens or security interests in any existing or
future collateral for the Senior Debt (the "Collateral"), actions with respect
to the occurrence of an Event of Default (as defined in the Loan Agreement),
actions with respect to the foreclosure upon, sale, release, or depreciation of,
or failure to realize upon, any of the Collateral and actions with respect to
the collection of any claim for all or any part of the Senior Debt from any
account debtor, guarantor or any other party) with respect to the Loan Agreement
or any other agreement related thereto or to the collection of the Senior Debt
or the valuation, use, protection or release of the Collateral, (ii) Lender's
election, in any proceeding instituted under Chapter 11 of Title 11 of the
United States Code (11 U.S.C. ss. 101 et seq.) (the "Bankruptcy Code"), of the
application of Section 1111(b)(2) of the Bankruptcy Code and/or (iii) any use of
cash collateral under Section 363 of the Bankruptcy Code or any borrowing or
grant of a security interest under Section 364 of the Bankruptcy Code by
Company, as debtor in possession. In that regard, Creditor agrees that (A) if
Borrower desires to use cash collateral under Section 363 of the Bankruptcy Code
and Lender consents to such use, Creditor will also consent to such use without
asserting any objection of any kind (including an objection on the grounds of
failure to provide adequate protection or Creditor's junior lien on such
Collateral), and (B) if Borrower desires to obtain credit from Lender under
Section 364 of the Bankruptcy Code to be secured by the Collateral, Creditor
will consent to such credit without asserting any objection of any kind
(including an objection on the grounds of failure to provide adequate protection
for Creditor's junior lien on such Collateral). Without limiting the generality
of the foregoing, Creditor waives the right to assert the doctrine of
marshalling with respect to any of the Collateral, and consents and agrees that
Lender may proceed against any or all of the Collateral in such order as Lender
shall determine in its sole discretion.
9. Lender's Waivers. No waiver shall be deemed to be made by
Lender of any of its rights hereunder, unless the same shall be in a writing,
and each waiver, if any, shall be a waiver only with respect to the specific
instance involved and shall in no way impair the rights of Lender or the
obligations of Creditor to Lender in any other respect at any other time. No
delay on the part of Lender in the exercise of any right or remedy shall operate
as a waiver thereof, and no single or partial exercise by Lender of any right or
remedy shall preclude other or further exercise thereof or the exercise of any
other right or remedy.
10. Information Concerning Financial Condition of Company.
Creditor hereby assumes responsibility for keeping itself informed of the
financial condition of Company, any and all endorsers and any and all guarantors
<PAGE>
of the Senior Debt and/or the Subordinated Debt and of all other circumstances
bearing upon the risk of nonpayment of the Senior Debt and/or Subordinated Debt
that diligent inquiry would reveal, and Creditor hereby agrees that Lender shall
have no duty to advise Creditor of information known to Lender regarding such
condition or any such circumstances. In the event Lender, in its sole
discretion, undertakes, at any time or from time to time, to provide any such
information to Creditor, Lender shall be under no obligation (i) to provide any
such information to Creditor on any subsequent occasion or (ii) to undertake any
investigation not a part of its regular business routine and shall be under no
obligation to disclose any information which, pursuant to accepted or reasonable
commercial finance practices, Lender wishes to maintain confidential. Creditor
hereby agrees that all payments received by Lender may be applied, reversed, and
reapplied, in whole or in part, to any of the Senior Debt, without affecting the
validity or enforceability of this Agreement and assents to any extension or
postponement of the time of payment of the Senior Debt or to any other
indulgence with respect thereto, to any substitution, exchange or release of all
or any of the Collateral and to the addition or release of any other party or
person primarily or secondarily liable therefor.
11. No Offset. In the event Creditor at any time is indebted
to Company, Creditor hereby irrevocably agrees that Creditor shall not deduct
from or setoff against any amounts owing by Creditor to Company any amounts
Creditor claims are due to Creditor with respect to the Subordinated Debt.
12. GOVERNING LAW; CONSENT TO JURISDICTION; WAIVERS. THIS
AGREEMENT SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF ARIZONA AND SHALL BE
INTERPRETED IN ACCORDANCE WITH THE INTERNAL LAWS OF ARIZONA AND NOT THE CONFLICT
OF LAWS RULES OF THE STATE OF ARIZONA GOVERNING CONTRACTS TO BE PERFORMED
ENTIRELY WITHIN SUCH STATE. CREDITOR HEREBY AGREES TO THE EXCLUSIVE JURISDICTION
OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF MARICOPA, STATE OF
ARIZONA OR, AT THE SOLE OPTION OF LENDER, IN ANY OTHER COURT IN WHICH LENDER
SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER
JURISDICTION OVER THE MATTER IN CONTROVERSY. CREDITOR WAIVES ANY OBJECTION OF
FORUM NON CONVENIENS AND VENUE. LENDER AND CREDITOR EACH HEREBY WAIVE THE RIGHT
TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN
ANY WAY RELATING TO THIS AGREEMENT, WHETHER SOUNDING IN CONTRACT OR TORT OR
OTHERWISE.
13. Section Titles; Gender; No Prejudice of Rights. The
section titles contained in this Agreement are and shall be without substantive
meaning or content of any kind whatsoever and are not a part of the agreement
between the parties hereto. The singular form of any word used in this Agreement
shall include the plural form and the neuter form of any word used in this
Agreement shall include the masculine and feminine forms, and vice versa. Lender
shall not be prejudiced in its rights under this Agreement by any act or failure
to act of Company or Creditor, or any noncompliance of Company or Creditor with
any agreement or obligation, regardless of any knowledge thereof which Lender
may have or with which Lender may be charged; and no action of Lender permitted
hereunder shall in any way affect or impair the rights of Lender and the
obligations of Creditor under this Agreement.
<PAGE>
14. Notices. Any notice required hereunder shall be in writing
and addressed to the party to be notified as follows:
If to Lender, at: FINOVA Capital Corporation
355 South Grand Avenue
Suite 2400
Los Angeles, California 90071
Attention: _____________
If to Creditor, at: Safeguard Scientifics (Delaware), Inc.
c/o Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, Pennsylvania 19087
Attention: Senior Vice President,
Finance
or to such other address as each party may designate for itself by notice.
Notice shall be deemed to have been duly given (i) if delivered personally or
otherwise actually received, (ii) if sent by overnight delivery service, (iii)
if mailed by first class United States mail, postage prepaid, registered or
certified, with return receipt requested or (iv) if sent by telex with telex
confirmation of receipt (with duplicate notice sent by United States mail as
provided above). Notice mailed as provided in clause (iii) above shall be
effective upon the expiration of three (3) business days after its deposit in
the United States mail. Notice given in any other manner described in this
paragraph shall be effective upon receipt by the addressee thereof; provided,
however, that if any notice is tendered to an addressee and delivery thereof is
refused by such addressee, such notice shall be effective upon such tender.
15. Successors and Assigns. This Agreement shall be binding
upon Creditor and Creditor's successors and assigns and inure to the benefit of
Lender and its successors and assigns.
IN WITNESS WHEREOF, this Agreement has been signed as of the
date first above written.
SAFEGUARD SCIENTIFICS (DELAWARE), INC.
By.......................................
Its......................................
FINOVA CAPITAL CORPORATION
By.......................................
Its......................................
<PAGE>
The undersigned hereby consents to, and acknowledges receipt of a copy of, the
foregoing Subordination Agreement this _____ day of March, 1997, and agrees that
it will not pay any of the Subordinated Debt or grant any security therefor,
until the Senior Debt shall have been paid in full in cash and all financing
arrangements between Company and Lender have been terminated. In the event of
payment by Company to Creditor in violation of the foregoing Agreement, a grant
of a security interest by Company to Creditor in any of Company's assets or such
other breach by Company of any of the provisions herein or of the foregoing
Agreement, all of the Senior Debt shall, without presentment, demand, protest or
notice of any kind, at the election of Lender, become immediately due and
payable.
CORE TECHNOLOGIES, INC.
By.......................................
Its......................................
<PAGE>
EXHIBIT A
SUBORDINATED NOTE
See Attached
<PAGE>
EXHIBIT 11
CORE TECHNOLOGIES (PENNSYLVANIA), INC.
Computation of Per Share Earnings (Loss)
<TABLE>
<CAPTION>
Primary 1996 1995 1994
------- ---- ---- ----
<S> <C> <C> <C>
Earnings (Loss)
Continuing operations $ (1,101,800) $ 51,600 $(10,392,100)
Loss from discontinued operations (1,745,200)
Gain (loss) on disposition of discontinued operations 650,000 100,000 (3,302,800)
------------ ------------- ------------
Net earnings (loss) $ (451,800) $ 151,600 $(15,440,100)
============ ============= ============
Common and common equivalent shares outstanding:
Weighted average common shares outstanding 8,887,000 10,112,000 10,437,000
============ ============= ============
Earnings (loss) per common share:
Continuing operations $ (.12) $ .01 $ (1.00)
Loss from discontinued operations (.17)
Gain (loss) on disposition of discontinued operations .07 .01 (.31)
------------ ------------- ------------
Earnings (loss) per common share $ (.05) $ .02 $ (1.48)
============ ============= ============
Fully Diluted 1996 1995 1994
------------- ------------ ------------- ------------
Earnings (Loss)
Continuing operations $ (1,101,800) $ 51,600 $(10,392,100)
Loss from discontinued operations (1,745,200)
Gain (loss) on disposition of discontinued operations 650,000 100,000 (3,302,800)
------------ ------------- ------------
Net earnings (loss) $ (451,800) $ 151,600 $(15,440,100)
============ ============= ============
Common and common equivalent shares outstanding:
Weighted average common shares outstanding 8,887,000 10,112,000 10,437,000
Assumed conversion of convertible preferred stock 1,500,000
------------ ------------- ------------
Weighted average common shares outstanding 8,887,000 11,612,000 10,437,000
============ ============= ============
Earnings (loss) per common share:
Continuing operations $ (.12) $ .00 $ (1.00)
Loss from discontinued operations (.17)
Gain (loss) on disposition of discontinued operations .07 .01 (.31)
------------ ------------- ------------
Earnings (loss) per common share $ (.05) $ .01 $ (1.48)
============ ============= ============
</TABLE>
<PAGE>
Exhibit 21
SUBSIDIARIES OF CORE TECHNOLOGIES, PENNSYLVANIA, INC.
Exclusive of inactive subsidiaries and companies in which Registrant
holds a minority interest, Registrant as of March 28, 1997 had the following
subsidiaries:
Place of
Name Incorporation
---- -------------
Airo Clean, Inc. Delaware
Corel Corporate Seating, Inc. Delaware
Maris Equipment Company, Inc. Delaware
-45-
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Core Technologies (Pennsylvania), Inc.:
We consent to incorporation by reference in the registration statements (No's.
33-25536 and 33-57972) on Form S-8 of Core Technologies (Pennsylvania), Inc. of
our report dated February 28, 1997 except as to the first paragraph in note 9,
which is as of March 14, 1997, relating to the consolidated balance sheets of
Core Technologies (Pennsylvania), Inc. and subsidiaries as of December 31, 1996
and 1995 and the related consolidated statements of operations, stockholders'
deficit, and cash flows and related financial statement schedule for each of the
years in the three-year period ended December 31, 1996, which report is included
in the December 31, 1996 annual report on Form 10-K of Core Technologies
(Pennsylvania), Inc.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 1-MO
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 124,200
<SECURITIES> 0
<RECEIVABLES> 4,351,500
<ALLOWANCES> 180,000
<INVENTORY> 647,100
<CURRENT-ASSETS> 6,095,000
<PP&E> 1,243,900
<DEPRECIATION> 839,800
<TOTAL-ASSETS> 8,735,300
<CURRENT-LIABILITIES> 4,904,800
<BONDS> 0
1,500,000
0
<COMMON> 92,200
<OTHER-SE> (4,680,700)
<TOTAL-LIABILITY-AND-EQUITY> 8,735,300
<SALES> 17,717,400
<TOTAL-REVENUES> 17,717,400
<CGS> 13,904,600
<TOTAL-COSTS> 13,904,600
<OTHER-EXPENSES> 4,269,900
<LOSS-PROVISION> 57,562
<INTEREST-EXPENSE> 569,700
<INCOME-PRETAX> (1,026,800)
<INCOME-TAX> 75,000
<INCOME-CONTINUING> (1,101,800)
<DISCONTINUED> 650,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (451,800)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
